The first Friday of every month has one of the most volatile (and therefore anticipated) announcements. It is called Non-Farm Payrolls (NFP). The nonfarm payrolls released by the US Department of Labor presents the monthly change in number of people employed excluding the farming sector. Generally speaking, a high reading suggests rising employment and is seen as good for the USD, while a low reading is seen as bad.
Last month’s NFP numbers were 295K, this month’s consensus is lower at 244K. If NFP exceeds consensus, EUR/USD may fall and break-through the bottom support heading towards parity. On the other hand, if NFP reports in less than expected, EUR/USD could rise making up some of its losses from the first quarter.
So, the market will most likely be volatile on Friday, and in these event driven instances, you can trade volatility using a long strangle option strategy.
Creating the Long Strangle
This involves buying an out-of-the-money (OTM) Call option and an out-of-the-money (OTM) Put option. If the market rises the Call will profit and if the market falls the Put will profit. (Please refer to the Call and Put Lessons on Moneyness if you would like to better understand the terms ATM, ITM, and OTM).
Note: The strangle strategy differs from a straddle which involves buying both Call and Put options at-the-money (ATM), and since OTM options are cheaper the long straddle, it is a cheaper strategy.
To buy a EUR/USD Long Strangle, buy a EUR/USD Call option with a strike above the market rate and a EUR/USD Put option with a strike below the market rate. See example below using strike rates +/-1% from market.
The chart below shows a Long Strangle strategies’ profit or loss at expiry over a range of market rates.
Advantages:
- Can profit from a move in either direction
- It is cheaper to buy compared with a Long Straddle
- You will not get stopped-out
- Your maximum loss is limited to the premium paid at open
Disadvantages:
- Break-even points, at expiry, are further away compared with a Long Straddle
- Time value is against you
You are trading the expectation of increased volatility without taking a view on direction, therefore this strategy is commonly used over major economic announcements. You may choose to use a long strangle over a long straddle if you expect extreme volatility and want to enter a position at a smaller risk, i.e. increased leverage.
The content provided is made available to you by ORE Tech Ltd for educational purposes only, and does not constitute any recommendation and/or proposal regarding the performance and/or avoidance of any transaction (whether financial or not), and does not provide or intend to provide any basis of assumption and/or reliance to any such transaction.
Editors’ Picks
EUR/USD hits two-day highs near 1.1820
EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY drops back below 157.00, as focus shifts to Japan snap election
USD/JPY is back in the red below 157.00 in the Asian session on Friday. The Japanese Yen recovers ground against the US Dollar amid some profit-taking ahead of Japan's snap general election on Sunday. The preliminary reading of the Michigan Consumer Sentiment Index report for February will be released later on Friday.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates Premium
The EUR/USD pair lost additional ground in the first week of February, settling at around 1.1820. The reversal lost momentum after the pair peaked at 1.2082 in January, its highest since mid-2021.
Gold: Volatility persists in commodity space Premium
After losing more than 8% to end the previous week, Gold (XAU/USD) remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000.
GBP/USD: Pound Sterling tests key support ahead of a big week Premium
The Pound Sterling (GBP) changed course against the US Dollar (USD), with GBP/USD giving up nearly 200 pips in a dramatic correction.
Bitcoin: The worst may be behind us
Bitcoin (BTC) price recovers slightly, trading at $65,000 at the time of writing on Friday, after reaching a low of $60,000 during the early Asian trading session. The Crypto King remained under pressure so far this week, posting three consecutive weeks of losses exceeding 30%.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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