The Job Report (Non-Farm Payroll) and the Consumer Price Index (CPI) are two significant market catalysts, economic events that can have a substantial impact on stock prices and trigger waves of volatility in the markets at various times throughout the year. These reports can also have a profound effect on options traders, as they provide opportunities for them to structure their trades in creative ways to take advantage of these planned events.
Because these reports cause implied volatility spikes, there are ripples in the markets when it comes to equity and rates. Traders who position themselves well for these macro events can learn when and how to strike while also effectively managing the risks that come with each setup. Our guide will go over the primary reasons why the CPI and Jobs Reports matter so much to options traders and how they can use these events as opportunities to secure a profit.
Why CPI & Jobs Reports Matter for Option Traders
Both of the reports we will be covering in our guide play a significant role in helping traders do the correct market research needed to plan their strategies for navigating the current market conditions.
- The CPI Reports serve as a measure of inflation. It is released every month by the Bureau of Labor Statistics, and the market loves to use this report to get a good gauge for how inflation levels might influence rate decisions, option premiums, or equity valuations.
- The Jobs Report (Non-Farm Payrolls) is a measure of the labor market and the current levels of employment across the country. This report can also have the same influence on Fed rate decisions, another indicator of where options premiums could be heading in the future.
There always seems to be a lot of implied volatility that occurs right before the release of either of these reports—it’s due to the uncertainty of the information that they might hold for the public. CPI or Jobs Reports don’t always have good news for investors and traders, so there are implied volatility upticks (fueled by uncertainty) that translate into higher option premiums. They’re worth more money, but it has nothing to do with actual value and everything to do with increased participation as traders scramble to manage these positions, which leads to inflated value.
After the reports are released to the public and the uncertainty begins to dissipate, these stocks or underlying assets will see sharp price movement, followed by a crush in implied volatility (IV crush), where there is a rapid drop in premium values. While there are some opportunities to be had trading around the release of these reports, there are some significant risks for traders if they don’t act quickly enough to avoid getting crushed by the premium values’ rapid drop.
Key Timing Considerations
Traders who want to make a profit around events like the release of the Jobs Report or the CPI Report need to have good timing to make these moves worthwhile. It is critical to look at these opportunities in terms of two stages: the pre-release period and the post-release period. Option traders need to respect the calendar and do the following things during these two periods to give themselves the highest chance of success.
Pre-Release Period
The time before the release of the report is characterized by elevated IV. Because option premiums go up with an elevated level of implied volatility, this is the prime time to sell options because you can make a quick profit. You could consider short volatility strategies if expectations are overblown, including moves like iron condors or different kinds of spreads.
Important Note: When using an option chain, a trader can consult the “expected move” portion of the chain to estimate the potential price movement. This gives them an idea of how much higher the price might go, so they can capture additional profits.
Post-Release Period
Once the reports have been released to the public and the uncertainty around the information in the reports has gone away completely, implied volatility will begin dropping off significantly. This is known as “IV crush,” and they can make long calls or puts lose a ton of value, even if they were directionally correct as predicted by the trader.
Because directional bets are rendered useless during a time of IV crush, the focus on the investment after the report release shifts completely to price breakout or fade trades, but it depends on what kind of surprise the reports deliver to the investors.
- Price Breakouts: This occurs when the asset’s price surpasses a defined resistance level or support level, which indicates a shift in market dynamics that could be leading to a new trend. Traders who spot these can make moves to profit from the start of a new trend as the price breaks away from the established trend or pattern. It could be upward or downward.
- Fade Trades: Another option once the reports have been made public is to place a contrarian trade or a “fade trade,” where you take an opposite position from a prevailing market direction. The premise behind this move is that the market is likely overreacting to the information and that the current trend is most likely to change direction.
3 Options Strategies to Trade CPI & Jobs Reports
Check out these options strategies that you can begin incorporating into your trading plan as you take positions around the release of the CPI or Jobs Reports. We’re going to cover three different moves you can take, including one for anticipating big moves, one for range-bound expectations, and one for taking advantage of the differences in implied volatility. Let’s dive in and find out when each strategy can be best used to maximum effect.
Straddles & Strangles (For Anticipated Big Moves)
These two strategies secure profit for a trader when there are big market movements in either direction, which means that the trader doesn’t have to get the direction the market is going correct at all. Straddles or strangles are ideal if the market is uncertain but likely to move. Either of these long premium trades brings in a profit, specifically when the underlying asset makes a move well beyond the breakeven point.
How to Set Up
The traders can begin by buying a straddle using an ATM call and an ATM put. They could also use a strangle by buying an OTM call and an OTM put. The biggest risk that is present with this trade setup is the fact that IV crush can destroy any value that the trade had built up from the premium, that is, if the market movement was smaller than originally anticipated.
- Entry: 1–2 days before report.
- Exit: Shortly after the move or sell into an IV spike.
Iron Condors or Butterflies (For Rangebound Expectations)
Using the rangebound strategies, the iron condor or the iron butterfly are best for when traders aren’t expecting too much to happen with their investments once the CPI or Jobs Reports are released. Each of these moves lets the trader sell volatility while capitalizing on overpriced options. The iron condor or fly is ideal to use when the implied move is priced too high.
How to Set Up
Traders should only get into the iron condor or the iron butterfly if they believe the underlying will stay within range. With each of these strategies, the trader is selling high IV ahead of the report, collecting premium, and then exiting quickly post-release. To get the timing of this trade correct, you must sell an OTM call spread and an OTM put spread at the same time.
- Entry: Enter ~1 day before the report, when IV is high.
- Exit: Within hours post-release, after IV collapses.
Calendar or Diagonal Spreads (To Exploit IV Differences)
This third option is much different than the previous two that focus on directional plays or betting on the magnitude of a market move regardless of the direction. The calendar or diagonal spreads let traders exploit differences in implied volatility to make a profit. The idea is to use near-term high IV and longer-dated low IV to make the strategy work.
How to Set Up
Since the calendar or diagonal spread both exploit volatility’s term structure, traders can sell front-week options that have high IV and buy back-month options, which are known for their low IV. The initial setup takes advantage of the high IV from the report release, and the second leg capitalizes on the longer-term IV from the stable market that comes afterwards.
- Entry: Enter a few days before the report.
- Best for: Directional or neutral bets with time decay edge.
Using near-term high IV, plus longer-dated low IV with the calendar or diagonal spread, lets traders enjoy a trade setup that has a structure that is neutral or directional. The main focus here is on exploiting differences with IV to make a profit after the report is released.
Using IV Rank & Expected Move to Guide Structure
Two factors for you to think about when developing the structure of your trading plan are IV rank and expected move, both of which can be found on any common options chain. You can know with confidence which strategy will work best by analyzing both of these factors.
- High IV Rank: When you have a high IV Rank of 50% or more, this is a clear sign that options are too expensive for you to secure a decent profit. This indicates a good environment for selling since the option premiums are inflated due to heightened IV going into the report release.
- Low IV Rank: Implied volatility being low makes for good entry points into new trades, so it is a good time to begin buying options, especially if you’re looking to make a big move later on. It’s key to set the expiration date around an event where the value can increase to eventually secure a profit.
- Expected Move: Traders can figure this out by reading an options chain and approximating the expected move based on the ATM straddle price. This is done by locating the strike price on the options chain that is closest to the current market price of the underlying asset.
Risk Management Tactics
Any form of trading you conduct or any strategies you use as a part of your greater trading plan need to have risk management in mind; otherwise, you’re leaving a gap wide open for big losses to occur. Good risk management is critical to your success, so we suggest using the following tactics for protecting your investments to the best of your ability.
- Defined-Risk Spreads: Use strategies where the max profit and loss are known at the time you initiate the trade. They’re a great go-to for traders who would like to limit their downside potential as much as possible, and they can be a great option for dealing with trades around the CPI or Jobs Reports.
- Set Up Alerts: Another great tactic for traders to use when trading around jobs reports is to set up alerts on stocks they’re interested in using for these opportunities. Setting stop-losses based on delta or price can help traders discover positions that have low premiums to establish an ideal entry point. The alerts will notify them when these stocks reach lower levels. Alerts can also be set up to notify the trader of when the prices reach a certain level as they gain value, a way for traders to monitor their progress and plan their exit on a profitable note.
- One Cancels the Other (OCO) Orders: This trading tool is excellent for dynamic risk management as it can be used to place two conditional orders at the same time. When one order is executed, the other is cancelled automatically. It can also be used to secure a profit when combined with limit orders or stop-loss orders.
- Ditch Trades Quickly After Report Release: Don’t hold trades for too long past the release of the CPI or Jobs Report because most of the benefits that come your way are during the volatility window that is present before the report is made public. Traders should have a plan ahead of time for exiting these trades before IV crush occurs.
Case Study Examples
Let’s look at an example of using one of the proposed strategies to successfully trade around a report release. In this case, we’ll be looking at the release of the CPI Report that is set to be made public by the end of the work week.
- The trader is interested in trading QQQ, using an ATM straddle that costs $3.
- There’s an implication that the move will be around 2.5%.
- If you look back on history, however, the release of the CPI Report has only ever moved the needle on QQQ by around 2%.
Taking all of this into account, the best strategy to move forward with would be an iron condor that is out-of-the-money by about 3-4% on either side. The idea is to profit if QQQ remains within that set range. However, traders must know that IV drops considerably post-report and that the spread will narrow quickly.
Common Mistakes to Avoid
Make sure you steer clear of making these common mistakes that other traders make when they’re attempting to profit around CPI and Job Reports. These are well-known mistakes, and any experienced trader would know right away about the best practices surrounding this trading strategy, so these are some practical tips for making your experience smoother.
- Holding Long Premium Too Long Post-Report: A lot of these strategies for trading around reports are centered on securing a profit during the time leading up to the report’s release. Holding premium after the release can leave traders vulnerable to IV crush, which can destroy their premium if not properly managed. Make sure to have an exit plan in place to get out of these trades quickly, making as much profit as possible before IV crushes decimates what you have built.
- Misjudging IV Collapse: Traders can make the mistake of using the wrong strategy under the idea that the market is going to move in a certain direction around the time of the report’s release. Options buyers, for instance, could run into the problem of buying contracts when IV is high because they envision a large move coming. Even when the stock moves as expected, the IV crush that comes afterwards can erode the value of the options, which could result in losses or smaller profits.
- Trading without a Plan: To succeed in this type of trading, you want to keep a close eye on the calendars for when the next expected report is coming down the pike. This gives traders the time to plan their next move and properly check the option chains for IV Rank and Expected Move data they need to form the best plan.
- Not Using a Defined-Risk Plan: It isn’t a good move for traders to use strategies where the maximum loss or profit isn’t known when they’re setting up the trade. It is key to structure your position around the risks that come with it, so you can map out the worst-case scenario and put plans in place to manage the potential downside.
Use Reports as a Calculated Volatility Play
Know the calendar, pick a strategy based on volatility expectations, and manage the risk—that’s the order of the moment when you’re trading options around CPI and Job Reports. Some might see this form of trading as a form of gambling, but we would agree that it is a well-thought-out and intentional volatility play that is calculated using historical data and relevant market insights.
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