Economic events offer traders a unique high-volatility environment in which to place trades.
Many equity traders like to trade during earnings and have specific set ups for these news events. Traders are drawn to these high-volatility events because of the large moves that equities can make after the earnings numbers are released
Many futures contracts also have events that act much like corporate earnings announcements and can be traded in much the same way.
Use Existing Set Ups More Often
A trader who likes to trade around news events and is comfortable with trade set ups designed for volatile moves may also want to look at economic events linked to futures markets and trade using options on futures. An options on futures trader can trade around news releases like crude oil inventory reports, unemployment data, or Federal Open Markets Committee Meetings (FOMC).
Just like an equity trader may trade around an FOMC event by trading the size or volatility of the anticipated move using strategies like straddles or strangles, so too can an options on futures trader.
EXAMPLE
A trader could trade various options strategies in the ZN 10-year Note futures, since FOMC will have a direct price effect on that contract. The trader can narrow in on just the earnings event using weekly Wednesday or Friday expirations.
These trade strategies can also be used to trade currency pairs during economic news events.
EXAMPLE
A trader who believes that the next European Central Bank (ECB) announcement on interest rates will push the Euro lower could purchase a put in the 6E EUR/USD contract. If the EUR/USD is trading around 1.059, the trader could buy a put that expires just after the ECB rate decision. Say the rate decision is due in 15 days, the trader could buy the 1.06 put in the 6E contract that expires in 25 days for around .0112.
Trade the Size and Direction of Market Moves
As with any options strategy, trading options on futures during economic news releases offers the benefit of defining your risk and reward when you enter the trade, and allows you to create strategies that do not solely rely on the trader having to pick the correct direction of the move and the size of the move.
Options have the benefit of allowing the trader to isolate one of the variables and reduce the factors that affect the profitability of the trade, allowing the trader to isolate the factors they want to trade. Rather than having to pick direction and size of the move, the trader can pick one or the other factors to trade. This strategy gives the trader more flexibility in constructing their trading strategies. Strategies such as, straddles, strangles and selling credit far out of the money can be employed with options on futures just like they are used in equity options.
An added benefit of options on futures is that most contracts have a Wednesday and Friday expiration. This means added flexibility to traders, allowing them to fine tune expirations to events they are trading.
EXAMPLE
A trader believes that the Unites States Jobless Claims report will have less of an impact on the market than what is currently being priced in by the market. The trader wants to sell volatility, meaning that they want the market to move less than expected.
The trader could sell a straddle in the ES. If the ES is currently trading for 2,264, they could sell a put and call with a strike of 2,265 that expires on Jan 27. The credit received would be around 36 points. The trade would start to lose money if at expiration the market was more than 36 points above or below 2,265.
By adding these additional events, the trader who likes volatility and large moves of news-driven trading strategies can add many more trades over the course of the year compared to simply trading corporate earnings releases.
Top Events Followed by Individual Investors
- Gross Domestic Product (GDP)
- Retail Sales Report
- Consumer Price Index (CPI)
- Producer Price Index (PPI)
- U.S. Housing Data
- U.S. Non-farm Payroll (NFP)
- European Central Bank Report (ECB)
- Federal Open Market Committee (FOMC)
- U.S. Oil Data
- Consumer Confidence Survey
Trade the 24-hour Market
Economic events occur across the globe 24 hours a day. The options on futures market allows you the flexibility to trade when these events occur in real-time instead of standard equity market hours.
After the cash market is closed, if a major event occurs, an equity trader would have to wait to participate in the move. As an options on futures trader, you can participate in that event any time of day. If the euro moves at 3 a.m. Eastern Time (ET), you can participate by trading the EUR/USD contract using strategies you may already know.
You can participate in news events like the ECB or Bank of Japan (BOJ) releases by trading the currency pair prior to the event announcement.
EXAMPLE
One day before the scheduled release of BOJ interest rate decision, you can trade the volatility by selling a straddle in the 6J contract. If the 6J contract is trading for .00864, you could sell the .00865 put and call for a credit of around .0001175. If you are correct and the 6J does not move as much as expected, you will keep a portion of the credit you received when you placed the trade.
The world is a global market, and events across the globe have impacts on the markets we trade. Options on futures offer not only the opportunity to trade economic events that originate in the United States, using similar trade set ups that you already know, but expand to global news events to offer many more trade possibilities.
If you are interested in adding a global perspective to your trading portfolio, options on futures can provide that opportunity for you to trade.
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