By Darrell Martin
An indication of how things are going pertaining to the construction section of the UK is evident in a report to be released at 5:30 AM EST, November 1, 2017. The Chartered Institute of Purchasing and Supply (CIPS) Construction Purchasing Manager’s Index (PMI) presents this report.
Because it surveys purchasing managers, who usually have early access to data about company performance, it can be a leading indicator to traders of overall economic performance. If the reading exceeds 50, it indicates expansion in the construction industry. If the number is lower, it points to contraction.
This is a tradeable news release. If the reading is higher than expected, it should be regarded as positive or bullish for the GBP. However, if it comes out lower than expected take it as negative or bearish for the GBP.
A strategy to consider is a straddle using Nadex GBP/USD spreads since movement is expected but direction is unknown. Since this is an early morning trade, place it the night before. Most traders would appreciate entering this trade as early as 11:00 PM, October 31, before going to bed and utilizing contracts with a 7:00 AM expiration.
Straddles are set up by buying an upper spread and selling a lower spread. To illustrate this, suppose the market is currently trading at 1.278. The 1.2450-1.2750 spread is sold and the 1.2750-1.3050 spread is bought. The following image offers a visual of a straddle contract set up.
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The middle line shows where the market is trading at the time. The sell side contract is displayed on the left with the buy side contract shown on the right. This demonstrates how far the market can move in either direction before reaching the floor or the ceiling of the contracts, which also cap the risk and reward of the trade.
This type of trade involves low risk. To understand better the amount of risk for this example trade, perhaps the lower spread was sold at 1.2738 and the upper spread was bought at 1.2759. Max risk is determined by subtracting the sold price from the bought price: 1.2759 - 1.2738 = 0.0021 or $21 combined risk for the contract.
The only way to completely lose the $21 risk is for the market to settle exactly at 1.2750. Place this trade before going to bed. Then wake up to see how the market played out. Sleep won’t be lost because the risk is small.
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