The unemployment numbers are out this morning. CNBC reported: “Nonfarm payrolls increased 850,000 for the month, compared to the Dow Jones estimate of 706,000 and better than the upwardly revised 583,000 in May. The unemployment rate, however, rose to 5.9% against the 5.6% expectation.”
The fact that new jobs beat expectations is good news. That shows economists are underestimating the strength of the economy.
Each report also includes revisions to previous months. Changes to April and May data were small — just 15,000 jobs were added as a result of new Bureau of Labor Statistics analysis.
But the direction of the trend is important. And the trend in employment data is up for now.
Of course, the question now is how to trade this report?
An Options Strategy for Volatile Uncertainty
The reaction in the first minutes after the report was mildly bullish. There were small gains in futures markets tracking major stock market averages. The Nasdaq 100 Index was the most active, opening up 0.5%.
Since there wasn’t a clear breakout on the news, a straddle could be used to benefit from today’s expected volatility. Historically, the first Fridays when unemployment data is released are three times more volatile than an average trading day.
Straddles are great for when the market is likely to be volatile, but the direction is uncertain. No matter which way the market turns, a straddle will profit on either the upside or downside — so long as the move is sharp.
A long straddle involves buying two options contracts — a put and a call — at the same strike price.
In this trade, I would suggest options on the Invesco QQQ Trust (Nasdaq: QQQ). As of this writing, QQQ is trading about 0.5% higher premarket, near $356.
This is a very short-term trade. We’re just looking to bank on today’s market action. So, I suggest using options that expire today, July 2.
Specifically, I suggest buying the July 2 $356 call and the July 2 $356 put. This trade should cost just about $150 per contract to open, with the call trading near $1.05 and the put at about $0.35 at writing.
If QQQ closes above $357.50, the trade will be profitable at that entry price. The trade will also be profitable if QQQ closes below $354.50.
Between those two prices, the trade will have a loss. But the maximum loss on the trade is the price paid to open the position. The maximum gain is significant if there is a large rally or selloff today.
Straddles can be used to trade economic news, and can even be entered the day before the report is released. It’s especially useful in market environments like we’re seeing today — uncertain, but with huge potential for volatility.
Michael J. Carr CMT CFTe
Editor, One Trade
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