Fundamental data releases represent excellent opportunities to use binary options to generate excellent returns. The reason the returns are more prolific after a release of economic data is that the market generally gaps or moves quickly in one direction after a new piece of news is received by the market. In general, according to technical analysis followers, the price of the asset contains all the current available news. Once a new piece of news is absorbed, the price moves to a new equilibrium level.
There are a number of ways to structure trade around economic data. The process starts with finding a strong source for economic releases and determining how important the data is relative to its ability to move the underlying market. Weekly, a trading opportunities guide is produced on this web site, which mentions all the economic or monetary releases that are important enough to move the markets upon release. Each of the fundamental releases will be summarized and contain a definition and why it is important to market participants.
Friday – April 2nd, 2010 – US Employment Report (1230 GMT)
This report shows the monthly change in employment excluding the farming sector. Non-farm payrolls is the most closely watched indicator in the Employment Situation, considered the most comprehensive measure of job creation in the US. Such a distinction makes the NFP figure highly significant, given the importance of labor to the US economy. The employment report is broken down into a rate and an aggregate number that show total number of jobs created. The rate has been constant at 9.7% (unemployment) for the past two months and expectations are for the same. The total number of jobs created or subtracted has been negative for more than a year and expectations on Friday are for a gain of 167 thousand jobs. The entire market will be watching these numbers and the market will move if expectations are not reached.
To trade a successful strategy around an economic release a trader can use multiple forms of binary options. For example, both the hit and miss option with a range are good candidates to use when trading around an economic release. When analyzing a strong economic data point, it is also very important to find a specific financial instrument that will move when the data is released. For the example above, the dollar vs. the Euro and the Yen are good candidates, along with the S&P 500 Futures, the 10-year Government Treasury note futures and potentially other equity indexes.
An example of the volatility around an economic released can be viewed in the chart below. On March 5, 2010, the February Employment number was released. The immediate reaction was a downdraft of 50 pips in the EUR/USD currency pair. Over the next 2 hours, the EUR/USD climbed to 1.3630, which created a big figure range. For a trader trying to take advantage of the volatility, a binary option would create a solid payout. The key to the payout is to find an option that would pay 2:1 or more. This type of range option (or hit or miss range option) would allow a trader to place hit options on both sides of the EUR/USD as the economic release was released. If the option paid more than 2 to 1 and was less than 50 pips away (in the case below), the payout would be positive.
With this in mind, the economic releases create the necessary volatility for successful binary option strategies. A trader should endeavor to find releases and instruments that conform to their strategy prior to risking capital.