By Darrell Martin
On January 10, I wrote how to trade the U.S. unemployment and NFP report by doing a strangle with Nadex binaries. To summarize, the article stated the EUR/USD usually moves about 100 pips from high to low after the NFP release. It also said to look at 10, 11, or 3 PM binaries that were out of the money with low risk and no stop loss needed, as all risk is capped on the U.S.-based and CFTC regulated Nadex Exchanges binary contracts.
As a trader, you did not have to pick a direction: if the market moved far enough up or down, the trade would be profitable. The plan was to look for a binary strangle that had a cost of less than $25 with a goal of making a 100% + return on risk the same day.
The NFP and unemployment numbers were released and the EUR/USD did exactly as expected. From low to high, it exceeded the average and moved 119 pips. From release to high, it moved 101 pips. The NFP report came in at 74k, much lower than the expected 196k. The unemployment rate came in a bit better than expected at 6.7 percent, compared to an expectation of 7.0 percent.
Related: How To Trade Unemployment & Non-Farm Employment Change With Low Defined Risk
The unemployment number, however, dropped mainly do to people dropping off the unemployment statistics rather than employment conditions improving. Thus, the NFP number was the big mover and this caused the USD to get massively weaker. Traders believed this would potentially lead to less tightening on QE and in monetary policy, therefore weakening the dollar.
Below is the chart of the EUR/USD
You could have entered each side of the buy and sell side binaries for less than a $12.50 risk per side (for a total risk of less than $25.00) previous to the release and set a take profit to make $25, plus the $12.50 (to cover the loss on the side the market does not move in) for a profit of $37.50 on either side. Don’t let the small numbers fool you – you could easily do 1, 10, 100+ contracts on this trade.
So if you did 100 contracts, the profit could have been $2,500 on this trade in minutes.
Before the report, the EUR/USD was trading around approximately 1.3590. So the strike you picked needed to be greater than 1.3490 (100 pips below the EUR/USD) and 1.3690 (100 pips above the EUR/USD), with a plan to exit at approximately $50 on the buy or sell side to net your 1:1 risk-to-reward-ratio trade (on Nadex you can enter and exit binaries multiple times before expiration).
You could have sold the 1.3520 (11 AM ET) for approximately $90 (a $90 profit potential and a $10 risk) and you could have bought the 1.3660 (11 AM) for approximately $10 risk (a $90 profit potential). Making the risk on the strangle $20 within our $25 max requirement and with the buy strike below the high we expected and the sell strike below the low we expected.
As you can see in the chart above, the market flew up. The strike you sold for $90 (1.3520 11 AM ET) ran up and took the maximum loss of $10, as exhibited by the chart below on the left. The strike that you bought (1.3660 11 AM ET) for $10 ($10 risk) flew up and ended up at its maximum value of $100. This allowed you to easily exit the contract at $50 within minutes of the release, as exhibited by the chart of the binary contract below on the right.
See article on Benzinga
