By Darrell Martin
Trading news events doesn’t have to be a surprising event. Of course, you always need to be aware of the news whenever trading as it can affect the markets. Information released can cause unpredictable reactions. Stops can be jumped when markets move fast enough against the direction of a trade. With high volatility in the market, implied volatility can be traded in spreads, specifically, US-based exchange, CFTC-regulated Nadex spreads.
Spreads have a floor and a ceiling price, marking the top and bottom or the market range for that particular spread. They can be traded long or short. The risk, as well as the profit is capped at the floor and ceiling. For example, if the market price goes against the direction the spread was traded and beyond the floor or ceiling, the trader can choose to stay in the trade. Risk will cap off at the floor or ceiling. The market may even reverse and come back in the direction of the trade and bring some profit. For these reasons, spreads can be very attractive for day traders.
For trading the news when there is implied volatility built into the prices of spreads, using creative strategies can offer high probability trades. Enter the Iron Condor. This strategy consists of two spreads, one stacked vertically on top of the other. The lower spread is bought with the ceiling where the market is trading at the time. The upper spread is sold with the floor where the market is trading at the time, thus meeting the ceiling of the bought spread. With a generous amount of implied volatility, it is possible to buy quite a bit lower than where the market is and to sell quite a bit higher than where the market is currently.
How could that setup provide a high probability trade? In the case of scheduled news, the Iron Condor can be quite profitable. This is especially true when there is a consistent reactionary move in the market, with a nice move and then a pull back to where it started.
On Friday, March 16, at 6:00 AM ET, the Euro Final Consumer Price Index (CPI) and Final Core CPI news will be released. Because the CPI measures the changes in the price of goods and services from the perspective of the consumer, it is a key indicator of purchasing trends and inflation.
Since this is an early morning trade, it can be entered the night before, as early as 11:00 PM ET using 7:00 AM ET expiration spreads. Based on the average move in response to this event, a nice move with a pullback, an Iron Condor with a combined profit potential of $35 presents a high probability trade.
What does that mean? It means each Nadex EUR/USD spread should have a profit potential of around $17 or more. The lower spread should be bought at a price around $17 lower than where the market price is and the upper spread should be sold at a price around $17 higher than the where the market is. With the right amount of implied volatility present in the market in anticipation to news reaction, there will be no problem finding qualifying spreads.
In the event that the market does the opposite of what is anticipated, it is important to have stops. If the market should make a move and take off, not making the expected pull back, then stops need to be placed where the 1:1 risk reward ratio points would be. In this trade scenario, that is where the market hits 70 pips above and below from where the market was at entry.
Max profit happens when the market pulls back to center between the spreads by settlement. If the market settles anywhere in between the breakeven points, or 35 pips above and below from where the market was at entry, then the trade will make some profit based on how far from the center it was at exit or settlement.
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