Thursday, September 1, 2011

Pre-Unemployment Report Long Straddle Strategy

The market has a tendency to trade in a range before big news events. One of the most important, especially in this huge recession, are the unemployment numbers. It is being released tomorrow morning. In the S&P chart, you can see two small candles(and I expect a smallish candle today) amidst a sea of big candles. Usually, this signifies a large move is coming.

Since we don't know how the market will react to any news, one way a trader could play the expected volatility is to purchase an option straddle. An option straddle is the purchase of an at-the-money call and an at-the-money put with the same strike price, same security and same expiration. Being long a straddle enables a trader to profit by a large movement either up or down. If the underlying stock or index stays relatively choppy or near the strike price, the trade will be a loser. There are many more facets to options trading and I will go into them at a later date.

Options trading is extremely high risk and only experienced traders should attempt it. But since this is an educational site, I want people to see the different strategies a trader will consider in different market dynamics. My indicators are mostly near-term bullish, yet there is significant resistance at the 1260 head-and-shoulders neckline and the VIX is in a continuation pattern indicating prices going lower. In such an inconclusive environment, a play on a day or two of volatility could be warranted. This is a trade I am considering, but I am in no way recommending you to follow.

All charts courtesy of

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