The monthly U.S. Employment Situation report—commonly called the jobs report—is perhaps the most closely watched fundamental indicator for traders and investors. Here’s why.
If you’ve ever tried catching a wave, you know that typically one of three things ends up happening: you catch the wave and ride it, you hold off and avoid it, or, if your back is turned, a rogue wave may catch you by surprise and knock you off balance. When major economic reports are released, they can be just as spirited (or capricious).
One report to watch for is the U.S. Employment Situation report, aka the “jobs report.” Even if you don’t fully understand what the report covers in detail, you probably know that the ebb and flow of employment figures can sway the surface of market sentiment as well as stir deeper currents of the U.S. economy.
Let’s take a deep dive into the jobs report, including the kinds of risks and opportunities it might present to those who dare trade it. We’ll also look at how you might take advantage of, or hedge against, the waves of volatility that occasionally upend an otherwise calm market when a number comes out higher or lower than expected.
The Employment Situation report (jobs report) is published by the Bureau of Labor and Statistics (BLS) at 8:30 a.m. ET on the third Friday after the so-called “collection week,” which typically means the data is released to the public on the first Friday of the month. The data paints a macro picture of who’s working, who’s not, and which industries are either creating or losing jobs. The only industry this report doesn’t take into account is farming (which is why many refer to the report as the Nonfarm Payrolls Report).
With farming out of the picture, what’s left is a summary of around 89% of the entire U.S. workforce (according to the U.S. Department of Agriculture). Analysts use this report to forecast consumer spending and other factors that may affect the economy. So, how might you ride this potentially volatile wave?
Shawn Cruz, manager of trader business strategy at TD Ameritrade, has a suggestion. “Before the release, check the consensus numbers, particularly those for wage growth,” he said. “If the numbers meet consensus, or come in a little under it or over it, you might not see much change in the markets. But if there’s a large miss or a large beat (meaning, the job numbers are far below or far above what’s anticipated), then that’s what tends to move markets.”
In case you didn’t know, “consensus” means the average numbers that analysts are expecting to see. The consensus figures serve as critical benchmarks for the actual figures.
The jobs report can bring very low volatility or very high volatility depending on the difference between the actual and forecasted numbers. So, how might you trade either scenario?
If the job numbers fall within the expected range, and if you anticipate minimal price changes in the form of a “sideways market,” then you might consider using options strategies (on an equity index ETF or futures contract) that are designed to potentially capitalize on a nondirectional outcome. Two popular options strategies are the iron condor and iron butterfly. Both approaches anticipate that price will remain within a fixed range, and both aim to profit from the decaying premiums of the short options of each “leg.” (Scroll through the gallery below to view the risk graphs for the iron butterfly and iron condor, plus the covered call, long call, and long put.)
For illustrative purposes only.
If you’re already holding at least 100 shares of an index ETF or one index futures contract, then you might consider selling a call option for either asset at a higher strike price to initiate a covered call position. In this case, you seek to collect “income” from the decaying options premium whose higher strike price you don’t think your ETF or futures will reach. Just bear in mind that if you’re wrong, and if the price moves well above the strike price, you may have to close out your options position at a loss or deliver your shares or futures contract should your call be assigned.
If you’re looking for a sizable beat or miss, you may want to consider trading the resulting market movement the same way you would any other trading scenario. For example, you might purchase an index ETF or index futures contract to seek profit from the upside. Similarly, you might go short either instrument to seek profit on the downside.
You can also buy a call to seek returns from an upside move or a put for a downside move. You could go long shares of an index ETF or an index futures contract to potentially capitalize on the upside, or go short to seek returns on a downside movement.
If you’re expecting only a moderate upside movement, you may consider buying a call spread. That’s simultaneously buying an out-of-the money call and selling a call at a higher strike price. The “short” call can help pay the premium on the long call, but it also limits the profit potential to the difference between the two strike prices, minus the premium paid for the spread and any transaction costs. Should the price of the underlying fall far below the long call, your loss would be limited to the premium you paid to place the spread.
In the opposite scenario, in which you expect the jobs number to cause the markets to tumble, you might consider buying a put spread—a long put paired with a short put at a lower strike price.
If you’re looking to hedge an existing long position (or short position) in a portfolio of stocks that's correlated with the broader market, you may choose to buy a put to protect yourself against a market decline or a call to protect your short position against a price surge. And be sure to remember the multiplier and other contract specifics of any position you trade.
Technical traders often look to support and resistance when considering key market entries or exits. But Cruz warned: “If there’s a big jobs report beat or miss, historical price levels may no longer hold, as the job numbers may end up repricing the fundamental structure of the markets.” Previous support and resistance levels may become irrelevant as the markets, responding to new data, may redefine so-called “overbought” and “oversold” price levels.
There are many ways to potentially take advantage of—or hedge against—the waves of volatility that may come with a jobs report. These are just a few of the many strategies to consider. But however you decide to navigate the jobs report, remember that preparation can be key. In other words, make sure you can see the waves coming, if only to avoid getting overtaken by any large swells that could potentially rock your portfolio.
While options are definitely not for everyone, if you believe options trading fits with your overall investing strategy, TD Ameritrade can help you pursue your options trading strategies with powerful trading platforms, idea generation resources, and the support you need.
Learn more about the potential benefits and risks of trading options
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Carefully consider the investment objectives, risks, charges and expenses before investing. A prospectus, obtained by calling 800-669-3900, contains this and other important information about an investment company. Read carefully before investing.
ETFs can entail risks similar to direct stock ownership, including market, sector, or industry risks. Some ETFs may involve international risk, currency risk, commodity risk, and interest rate risk. Trading prices may not reflect the net asset value of the underlying securities.
Spreads, Straddles, and other multiple-leg option strategies can entail additional transaction costs, including multiple contract fees, which may impact any potential return. These are advanced option strategies and often involve greater risk, and more complex risk, than basic options trades.
The covered call strategy can limit the upside potential of the underlying stock position, as the stock would likely be called away in the event of substantial stock price increase. Additionally, any downside protection provided to the related stock position is limited to the premium received. (Short options can be assigned at any time up to expiration regardless of the in-the-money amount.)
A long call or put option position places the entire cost of the option position at risk. Should an individual long call or long put position expire worthless, the entire cost of the position would be lost.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 TD Ameritrade.