How to Trade Friday’s Employment Report

by Serge Berger | April 4, 2012 9:34 am

This Friday (April 6), the Labor Department releases the March employment report, but markets won’t be open to react to it. Well actually, equity futures will be open until 9:15 AM ET on Friday but with nearly all markets closed from Europe to Asia, U.S. trading volume will be dismal at best. My simple suggestion; don’t trade it…not until next week.

On average, the non-farm payrolls and unemployment rate reports have a tendency to move the markets more than any other economic release. The chart below shows the S&P 500 Index and each non-farm payroll report over the past twelve months. The bottom part of the chart displays a five-day average true range (ATR). On average, the ATR expands at least for a couple of days after a non-farm payroll report is released.

Chart of S&P 500 Index (SPX), average true range (ATR)
Click to Enlarge

The big rally so far this year has also brought some investors back into the equity markets and thus exposed to any downward drifts in stock prices. Given the potential move in markets on the back of the labor force report, it may be wise to protect or trim some of these newly acquired risk positions.

Volatility remains at low levels historically, with the CBOE Market Volatility Index (VIX[1]) trading well below 20 and recently closer to the 14 and 15 area. Should one consider hedging any long positions, therefore, now may be an opportune time to do so.

Not only is volatility at a historical low, but May 141-strike calls (roughly at-the-money) on the SPDR S&P 500 ETF (NYSE:SPY[2]) are actually more expensive than the at-the-money puts. Implied volatility for the 141-strike calls currently stands at 15.15% compared to the puts, with an implied reading of 13.50%.

Whether or not the March employment report will be a meaningful market move we won’t find out until next week, but given the large run-up in equity prices thus far in 2012, some mean-reversion is likely around the corner.

In terms of options-trading strategies to play in the short term, I view long puts, bear put spreads or even in some cases long straddles as viable choices at the current juncture. I would shy away from the covered-calls strategy as the payoff diagram is the same as that of a short put. Given that we may be near a point of anywhere from a 4%-10% correction in equity prices, the “cheap” calls traders can sell right now offer little protection.

  1. VIX:
  2. SPY:

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