As you may know, the central banks of various countries are always releasing key economic data reports. These reports include unemployment data, gross domestic product (GDP), interest rates, and more.If the actual data release is in line with the forecast, the markets will remain fairly stable. However, if the actual news release deviates from the forecast, the markets may move rather quickly and drastically.U.S. jobless claims is 350,000 and the actual number comes up at 360,000, then you can expect that the U.S. dollar will lose value relative to other currencies.
This is due to the fact that the jobless claims came out higher than expected, which is a negative sign for the U.S. economy and thus the U.S. dollar.This is typically noted in an economic calendar. Economic releases typically have a significant effect on the value of a country’s currency relative to other currencies.If you believe that an economic event will have a significant impact on a currency pair but are not sure of the direction, you may decide to enter a
long strangle (long volatility) trade.
You can do this by buying a binary option with a strike price higher than market price and selling a binary option with a strike price lower than the market price.For example, if the release is higher than expected, the EUR/USD pair may shoot up.In this case, you can simply get out and lock in your profit of $40 for the entire long strangle.One thing that you may want to consider is entering a take‐profit order as soon as you get in on the trade.
This way, as soon as a certain profit target of an option is hit, the entire long strangle will close and lock in a profit for you. Of course, you can also exit this trade early to mitigate losses.Exhibit 11.3 depicts the profit and loss (P&L) of going long the 1.3100 binary option and short the 1.2900 binary option. The x‐axis represents the price of the underlying, and the y‐axis represents the profit and loss.
POLITICAL EVENTS:The markets are also always reacting to news that is related to political and economic stability or instability. If you see that there is instability in certain parts of the world, presidential elections, or new policy that may affect the economy, you can implement binary options to take advantage of it.For example, when a new president is elected, the market moves.
If you are not sure who will be elected and how the market will react, you may decide to enter a long volatility strangle trade. This way, you don’t have to forecast the direction of the market, just simply the fact that the market will move. If you believe that a certain political event will not cause a drastic move in the markets, you can take a short volatility strangle trade.
SPECULATING ON ACTUAL NEWS RELEASES:In addition to speculating how various underlying instruments will react to an economic data release, you can actually speculate on the outcome of an economic data release itself.Let’s take a look at a binary options trade on an economic event.Binary Option Trade on an Economic EventLet’s review the following trade example:
Rationale Let’s say that you are interested in taking a position on the
jobless claims report that will be coming out on Thursday. You think that fewer people have filed for unemployment benefits and that the job market as a whole has been improving. Last week 352,000 new unemployment claims were filed, and you believe that this week the number will be less.