Previous Story
Non-Farm Payroll (NFP) and Option Strategies
NFP is a monthly data release showing how many people in the United States were employed during the previous month (excluding the farming industry). It is a highly anticipated announcement which often causes volatility in the markets specifically on USD currency pairs.
A better than expected result may strengthen the USD whereas a worse result may have the opposite effect. Due to the importance of the NFP data, it is usual for USD pairs to experience large swings immediately after the announcement because the mass market panic, react and decide which trades to place.
When buying options over an NFP release there is no risk of being stopped-out by large price fluctuations because buying an option does not require a stop-loss to limit loss. You may buy an option to trade a rising or falling trend or both at the same time! The following trade examples set-up on the easy-forex web-platform explain how this is possible. In these examples we refer to EUR/USD as the traded pair however options may be used to trade any currency pair, gold or WTI OIL.
Trade 1: EUR/USD to rally
If you expect a weak NFP result and USD to weaken, hence EUR/USD to rise, you may buy a Call option because a Call gives you the right to buy EUR/USD at a certain rate (known as the strike) up until an expiry date. As EUR/USD rises above the strike rate the option gains in value and you may profit. The cost to buy the option (‘open premium’) is your maximum risk. You may close the option at any time before expiry to lock-in profit or reduce a loss.
For example, the below EUR/USD Call to buy 10,000 EURs at 1.1300 over the next 7-days costs a 79.93 USD premium to open the option trade.
The Call will generate income as EUR/USD rises above 1.1300, for example if the pair is trading at 1.1500 by expiry the Call will payout 200 USD. If EUR/USD does not rise and expires at or below 1.1300 the option will have no value and you will lose the open premium.
Trade 2: EUR/USD to fall
Trade 2: EUR/USD to fall
If you expect a strong NFP result and USD to strengthen, hence EUR/USD to fall, you may buy a Put option because a Put gives you the right to sell EUR/USD at a certain rate (strike) up until an expiry date. As EUR/USD falls below the strike rate the option gains in value and you may profit.
For example, the below EUR/USD Put option to sell 10,000 EURs at 1.1200 over the next 7-days costs a 66.83 USD premium to open the option trade.
The Put will generate income as EUR/USD falls below 1.1200, for example if the pair is trading at 1.1100 by expiry the Put will payout 100 USD. If EUR/USD does not fall and expires at or above 1.1200 the option will have no value and you will lose the open premium.
Trade 3: EUR/USD to fluctuate in either direction
Trade 3: EUR/USD to fluctuate in either direction
If you expect the pair to move significantly either up or down, you may buy a Call and a Put at the same time. To set-up an option strategy of this kind, move to the platform’s Advanced mode of trading, select Call on the first line and click ‘turn into strategy’ to add a Put on a second line (see image below).
Through holding both types of options it allows you to benefit from a move in either direction; the Call will payout as EUR/USD rises and the Put will payout as the pair falls. What’s important is that EUR/USD must move significantly in either direction to achieve a net payout.
For example, the image below shows a Call and a Put both with strike at-the-money (0%) matching the current EUR/USD mid-market rate (1.1262). Both options expire in 7-days’ time and are set to an amount of 10,000 EURs. The total cost to buy this positions is 95.68 (Call) + 94.59 (Put) = 190.27 USD (123.84 GBP). This cost is known as the ‘open premium’ and is also your maximum risk.
At expiry if EUR/USD is trading above the 1.1262 strike, the Call will payout but the Put will not. The Call’s payout must cover the 190.27 USD open premium for a profit to be made. This will be the case as long as EUR/USD is trading above 1.1452 (1.1262 strike + 0.0190 cost of option per 1 EUR).
If, at expiry, EUR/USD is trading below the 1.1262 strike the Put will payout but the Call will not. For the Put’s payout to cover the 190.27 USD cost to open the option position, EUR/USD must be trading below 1.1072 (1.1262 strike – 0.0190 cost of option per 1 EUR).
In summary, for the overall position to be profitable EUR/USD must be trading outside the range 1.1072 to 1.1452 by expiry on Monday 8th September at 14:00 GMT. If EUR/USD is trading within the range a loss will be made but this loss is limited to the 190.27 USD premium paid at open. You may close the trade before expiry to lock-in a profit or reduce a loss. Note options are worth more before they expire hence break-even points are closer before the expiry date. To review your profit potential over a range of EUR/USD rates click on the ‘Scenarios’ button on the trade.
The post Non-Farm Payroll (NFP) and Option Strategies appeared first on Forex.Info.
