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Stocks & Commodities V. 34:12 (30–32, 43): Trading the Nonfarm Employment Report by Gail Mercer

Copyright © Technical Analysis Inc. www.Traders.com Copyright © Technical Analysis Inc. www.Traders.com

Trading the nonfarm employment report can be dangerous and result in a margin call if you are on the wrong side of the market. Here’s a better way to take advantage of high volatility using binary options.

by Gail Mercer

he nonfarm employment report is known to create mar-ket volatility, which can move the forex, commodities, and futures markets. To get an idea of how markets can move when this report is released, I have summarized

the average movement for each of the instruments from my 2015 market volatility report in the table in Figure 1.

Mind volatilityThis year, the markets have seen even more movement because of the potential upcoming rate increase. For example, in June, when the numbers came out much worse than anticipated, in one 15-minute bar, gold went up from a low of 1223.2 to a high of 1246.1 (almost 23 points or 230 ticks). The USD/JPY went down from the high of 108.81 to a low of 107.77 within a 15-minute bar (or 104 pips). Then in July, when the numbers Eu

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Trading the Nonfarm Employment Report

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Copyright © Technical Analysis Inc. www.Traders.com

Stocks & Commodities V. 34:12 (30–32, 43): Trading the Nonfarm Employment Report by Gail Mercer

Copyright © Technical Analysis Inc. www.Traders.com

came in higher than anticipated, the USD/JPY went up 105 pips, while gold came down more than 22 points (or 220 ticks).

Although there are many binary option brokers, as I described in my S&C article last month, “Choosing A Binary Option Provider,” there are only three binary option exchanges that are regulated and currently offer binary options in the United States. They are:

Cantor Exchange LP•North American Derivatives Exchange, Inc. •(NADEX)NYSE ByRDs•

The Cantor Exchange LP offers limited binary options on forex and gold, and the NYSE ByRDs are offered on limited stocks for a weekly expiration. Nadex (North American De-rivatives Exchange, Inc.) offers binaries on a much broader market including Asian indexes, European indexes, US indexes, commodities, and forex. Since Nadex offers a much broader array of instruments, I have used the Nadex exchange for this article to discuss trading the nonfarm employment report.

the good about binariesBinary options, in general, provide traders with limited risk and limited reward on every trade. Binary options have a maximum payout of $100. Traders choose their risk level on entry and they cannot lose more than they pay on entry. Because binary options limit risk on entry, they are ideal for trading during high-volatility periods such as during the release of market reports.

The binary option order ticket provides you with all the information you need to make a decision on whether to enter the trade or not. For example, shown in Figure 2 is a typical order-entry ticket.Theorderticketimmediatelyidentifiesthefollowing:

Strike statement and expiration (based on New York •time)Current price (Nadex indicative index)•Hours and minutes till expiration•Price for going long or short•Maximum loss (red box)•Maximumprofit(greenbox).•

In the case of Figure 2, the strike statement is USD/JPY > 103.46 by 8 am on October 19, 2016. If the trader agrees that the USD/JPY will be greater than 103.46 by 8 am, he buys the strike. The risk is $30 per contract or $300 if trad-ing 10 contracts (red arrow).Hismaximumprofit, if heldtill expiration and price expires greater than 103.46, is $700 (green arrow).

Since market reports create volatility, traders can limit their risk even further by using out-of-the-money (OTM) binary options. OTM binary options are trades that are placed either one or more strikes away from where price is currently trad-ing. Since at-the-money (ATM) binary options are always

trading around $50 of risk, the further the trader goes away from the currently traded price, the lower the risk is. However, you need to keep an eye on market volatility to make sure thatpricecanmovesufficientlyclosetobeingin-the-money(ITM), which simply means that the binary option expires in the trader’s favor.

For example, using the USD/JPY binary option chart in Fig-ure 3, if the trader has a bias to the upside, his choices are:

ITM strike at 103.34, which has $63.75 of risk and is one •strike below where price is currently tradingATM strike at 103.38, which has $50.75 of risk, and is •where the price is currently tradingOTM strike at 103.42, which has $38.25 of risk, and is •one strike above where price is currently trading.

Although the chart in Figure 3 shows only four strikes for the USD/JPY two-hour binary options, there are always 19 strikes

opTioNs

Figure 1: eFFeCT OF NONFarm emPLOYmeNT rePOrT. Here you see the average movement of indexes, commodities, and forex pairs for 2015 after the release of the nonfarm employment report.

Figure 2: Order-eNTrY TiCkeT. Here you see the strike statement and expiration, current price, hours and minutes till expira-tion, price for going long and short, max loss, and max profit.

Figure 3: FOur STrikeS aNd maNY mOre. Here you see four strikes for the uSD/JPY two-hour binary options although there are many more available.

Nonfarm Employment change

YM 81ES 42NQ 72DAX 109GC 133CL 47AuDuSD 59EuruSD 78GBPuSD 64uSDCAD 84uSDCHF 62uSDJPY 84

OTM

ITM

ATM

Pivot daily

Data is indicative only

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Stocks & Commodities V. 34:12 (30–32, 43): Trading the Nonfarm Employment Report by Gail Mercer

Copyright © Technical Analysis Inc. www.Traders.com Copyright © Technical Analysis Inc. www.Traders.com

available and the strike width (distance between the strikes) is four pips. For the gold two-hour binaries, there are a total of nine strikes offered and the strike width is one point. This is vital information when combined with the average movement for the nonfarm employment because traders can now calculate how far they can go out with their strikes for the report.

risk ManageMentUsing the October 7, 2016 nonfarm employment report as an example, immediately prior to the release, here’s what these other markets were trading at:

Gold: 1256.8•USD/JPY: 103.61•

AsidentifiedinthenonfarmemploymentreportinFigure1,the average movement for gold is 133 ticks (or 13 points) and 84 pips for the USD/JPY. Since the trader needs price to move two strikes ITM, a good rule of thumb is to divide the average movement by four to identify how far OTM you should go. In this case, you should not go further than three points on gold (13 points divided by 4) or 21 pips on the USD/JPY (84 pips divided by 4).UsingOTMbinaryoptionstolowertherisk,tradingfive

contracts on each, the trades you see in Figure 4 were ex-ecuted.

Thetotalriskexposureforthetrader,tradingfivecontractsoneachinstrument,waslockedinat$292.50.Thetotalprofitpotential, based on a maximum payout of $100 minus the risk paid on entry, was $707.50. If all the trades expire ITM, the return on investment would be 242%.

Unlike with futures or forex trading, where stops can be jumped and you can lose more than what your initial risk limit was, with binary options, the risk is guaranteed. In other words, you can’t lose more than the $292.50 that you paid on entry regardless of the outcome of the report.In addition, you have now defined with precision what

your potential outcomes are if you hold the trades through expiration. If held till expiration, there will only be one of two potential outcomes:

You either lose the amount you paid on risk, or•Youreceivethefullprofitpotential.•

However, with Nadex binary options, you can also exit early usingaprofittarget.Forexample,sincethegoldbinaryop-tiondidnot expireuntil10am, the followingprofit targetwas set:

Gold:profittargetsettocapture$367.50.

The 15-minute charts in Figures 5 & 6 show what happened

Since market reports create volatility, traders can even further limit their risk using out-of-the-money (OTm) binary options.

Instrument Strike Risk on Entry Profit Potential

Gold Long 1259.7 by 10 am $160.00 $317.50

uSDJPY Long 103.38 by 9 am $132.50 $377.50

Figure 4: eXeCuTed TradeS. Five contracts were traded on each of these using out-of-the-money (oTM) binary options to lower the risk.

USD/JPY > 103.38

$26.50 p/ct.

Expired ITM by 9 am resulting in $73.50 profit p/ct.

22.00 10/7 02:00 04:00 06:00 08:00

103.900

103.800

103.700

103.600

103.500

103.400

103.300

103.200

103.100

103.000

102.900

102.800

USD/JPY - 15 min. forex

Exit at $87.50 for a profit of $55.50 p/ct

22.00 10/7 02:00 04:00 06:00 08:00

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@GC - 15 min. COMEX

Gold > 1259.7 by 10 am

$32 p/ct

Figure 5: HOW did uSd/JPY PerFOrm? Immediately after the announce-ment, the uSD/JPY moved against the binary option trades but then resumed the downward movement and expired in-the-money (ITM).

Figure 6: HOW did gOLd PerFOrm? The gold trade immediately moved in favor of the trade and the profit target was filled.

Copyright © Technical Analysis Inc. www.Traders.com

Stocks & Commodities V. 34:12 (30–32, 43): Trading the Nonfarm Employment Report by Gail Mercer

Copyright © Technical Analysis Inc. www.Traders.com

aftertheannouncement(profitandriskispercontractandtheblack line indicates where the instrument was trading on entry). The red arrow on the USD/JPY chart in Figure 5 shows the price bar where the short binary option trade was executed. The green arrow on the gold chart in Figure 6 shows the price bar where the long binary option trade was executed.

Immediately after the announcement, the USD/JPY initially moved against the binary option trader but then resumed the downward movement and expired ITM. However, the gold tradeimmediatelymovedinfavorofthetradeandtheprofittargetwasfilled.

other reports Matter tooAlthough the nonfarm employment report creates volatility in the markets, there are a multitude of market reports that can be traded using binary options. For example, the crude oil inventory report is typically released every Wednesday at 10:30 am US Eastern Time. The crude oil inventory report offers trading opportunities on both crude and the USD/CAD forex pair (USD/CAD typically will move in the opposite

direction of crude).Incorporating binary options into your arsenal allows you

to trade during those times when report releases could bring some volatility in the markets. And if the market goes against you, binary options can help limit your risk.

Gail Mercer, founder of TradersHelpDesk, is a trader, mentor, author, and speaker residing in North Carolina. She has over 15 years of experience in trading and in the development of custom indicators. She is experienced in trading futures, forex, and binary options using volume analysis as well as divergence. She can be reached via email at gm@tradershelpdesk.com.

Further readingMercer, Gail [2016]. “Choosing A Binary Option Provider,”

Technical Analysis of StockS & commoditieS, Volume 34: November.

‡North American Derivatives Exchange, Inc.

opTioNs

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