Tomorrow's employment number looks to be the wildcard in a game of poker that only a fool would be placing big bets on. Current pulse from economists has the unemployment line getting longer after losing 223,000 jobs in April. Many analysts are expecting the economy to have shed 50,000 jobs this month, with expectations for the unemployment rate to rise to 4.6%.
Today's action in the bond market perhaps gives credence to the markets "belief" that we are going to see a poor jobs report tomorrow. Currently, all three YIELDS on the major treasury maturities we follow are lower (buying in bonds) as the perception that a poor employement number may have the fed back at the chopping board and leaning toward more rate cuts.
That's the wild card that I have a problem with. Yes, a "bad" jobs report showing unemployment on the rise might have the market selling, but that "bad report" may be viewed as POSITIVE as it relates to further rate cuts and have the market buying. As I've written before, it's not what you and I think will happen that important, but it's what the MARKET response is to the number that matters.
I see tomorrow's jobs report as a 50/50 trading proposition and to try and guess what the markets response will be would be that of speculation. I'm not much of a speculator and usually don't try and trade those moves.
However, when I feel that the market might move, I look to trade straddles. A straddle trade I currently like would be buying the same strike price and expiration on the QQQs.
PremierMarkets.com is going to profile such a trade for today in the June 45 calls (QQQFS) currently offered at $2.40 and the June 45 puts (QQQRS) currently offered at $1.70. If the markets respond volatile (one way or the other) a trader might have a good opportunity to profit from the volatility should it take place. The biggest threat to a straddle trader is no volatility. As outline above, a trader playing 1 contract on each side of the straddle would be set back $410 (1 call and 1 put) excluding commissions. A subscriber wanting to implement such a trade understands that the maximum dollar amount they can lose is what the trade costs. If the QQQs were to trade $5 higher or $5 lower than the $45 strike before expiration, then the trade should result be in a break-even position at that point.
Traders, whose accounts may be holding all long positions, may want to think differently and simply purchase a QQQ put. The thinking here would be that a positive market response would have your long positions performing to the upside with the broader market. However, if the market response were negative, then perhaps the QQQ put would provide somewhat of a hedge to the portfolio. Something to think about at least.
With what I'm seeing today in the bond market and the Gold/Silver Index (XAU.X) it looks to me like the market is betting on a less than favorable jobs report and one that will probably hint of economic slowing still continuing. It makes "economic sense" that a hedge against inflation "gold" is following a lower bond yield direction today. This morning however, I did mention in the hot list that the Gold/Silver Index (XAU.X) being higher didn't make sense as it related to lower bond YIELDS. So why are stocks higher? Perhaps it's just some profit taking from shorts, but it might also be the market anticipating further fed easing. This is frustrating to some, but that's how a good trader overcomes uncertainty. There's nothing wrong with just sitting on the sidelines, then playing the market response. Since the jobs number comes out before the opening of stocks, a trader that doesn't want to risk a gapping market can turn to the straddle as a viable options strategy for such an event.
Options were created to help institutions and investors hedge risk. While many traders like to use them to leverage their capital and speculate, PremierMarkets.com tries to avoid such strategies. As long as the trader goes into the trade understanding and only betting what they can afford to lose, then a bet on one side of the trade has its place. I think the smart move in any type of options bet before tomorrows fed meeting would be a straddle in the QQQ.