By Darrell Martin
Four scheduled news events regarding Durable Goods Orders and Preliminary Gross Domestic Product numbers for the US will be released Friday, May 26, at 8:30 AM ET, making for a trade opportunity with a low risk strategy. For a scheduled news event, where the market typically will react with a move and then tends to pull back, a strategy with spreads can be traded to collect profit on the pull back. This kind of strategy, called the Iron Condor, does not depend on the market moving in a certain direction for profit.
North American Derivatives Exchange, or Nadex, lists intraday spread options for day traders interested in capped risk. The spread has a floor and a ceiling marking the range of the market being traded. It can be traded long or short, and risk is limited to the floor and ceiling. Additionally, stops can be placed to further manage risk.
Using the EUR/USD market, two spreads are traded. One spread is bought and the other spread is sold. The lower spread is bought with its ceiling meeting the floor of the sold upper spread and is where the market is trading at the time. The bought spread price should be approximately 17 pips below from the current underlying market price giving it a profit potential of $17 or more. The sold spread price should also be approximately 17 pips away but above from the current underlying market price. The combined profit potential for the trade should be approximately $35 or more depending on exact entries.
Enter at 8:00 AM ET for 10:00 AM ET expiration. Profit is made on the pull back, or if the market remains close to where it started. Risk can be managed with stop limit orders in the event the market takes off far enough and doesn’t pull back. The 1:1 risk reward ratio points for this setup are approximately 70 pips above and below from where the market was at entry. This is based on exact entry points. Simply add the combined total risk together i.e., 35 + 35 = 70.
The market can move as far as 35 pips above and below from where it was at entry and be at breakeven. Anywhere in between those two points will make some profit. Max profit is the market being right in the middle between the two spreads at settlement.
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