How to Trade Bonds Around the Jobs Report
NEW YORK (TheStreet) -- The U.S. added 146,000 jobs and the unemployment rate dropped to 7.7% last month.
Stock index futures are taking the numbers in stride, currently trading up 6 handles at 1,419.25 on the December S&P 500. The S&P 500 futures are approaching resistance around the 1,420-1,425 area. Bonds and notes took it on the chin following the number, with March bond futures dropping over a full handle to trade as low as 149'11. This level coincides with the 20-day exponential moving average (EMA). As of this writing, the market has held that level and is bouncing off the lows.
In my opinion, with the S&P 500 running into resistance, and bonds holding the 20-day EMA, this could provide an excellent put-selling opportunity in bonds or notes. After all, If the S&P 500 fails at these levels, bonds could potentially rebound sharply.
In addition, until the fiscal cliff is resolved, I can't imagine bonds moving a great deal in one direction or the other. Obviously, the non-farm payrolls report can provide some very good and volatile trading opportunities. One of my favorite opportunities is selling bond options around this report. In my experience, the options tend to get "bid up" as the report approaches, as institutions and larger players position ahead of the numbers. Smaller "specs" also bid up options in the hopes of catching a large directional move after the release. Having watched this report for many years now, I have always found it fascinating how quickly the market will drain premium from the bond options immediately following the report. The market reaction following the report more often than not is a non-event. Regardless of the market reaction, once the cat is out of the bag, the element of surprise is completely removed and the options are deflated. Adding insult to injury, the non-farm payrolls report is released on a Friday. This is one of my favorite days to sell premium, as traders not only price in the surprise risk being removed, but they also start pricing in the weekend right away. As an option writer, we want to try to take advantage of the "volatility crush" as well as any additional time decay days that we can, and this non-farm payrolls setup is one of my favorites to accomplish both.
I encourage you to visit my Web site and download my free e-book The A To Zeman Guide to Option Selling. As always, feel free to email me to discuss how premium collection strategies may fit into your overall strategy. Please note today is Dec. 7, and all trade data is based on the most recent information. Futures and options trading is inherently risky and unsuitable for all investors. Past performance is not necessarily indicative of future results. Stop-loss orders intended to limit losses to certain amounts may not be effective because market conditions may make it impossible to execute such orders. Commodity Futures Trading Commission disclosure for licensed brokers: This material is conveyed as a solicitation for entering into a derivatives transaction.
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