Trade EUR/USD Volatility over NFP

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.