Bull & Bear T-Note Option Strategies to Safely Engage Payroll Report

September 1, 2016 11:04AM CDT

In Tue's Technical Blog we reiterated a developing bearish count that was reinforced by last week's clear break below the past month-and-a-half's 131.00-area support in the now-prompt Dec contract.  Again and TO THIS POINT, the sell-off attempt from 05-Jul's 133.00 high close shown in the daily close-only chart below is only a 3-wave affair.  This means the resumed decline from 29-Jul's 132.035 corrective high and key risk parameter is EITHER a correction-completing c-Wave ahead of a resumption of the secular bull OR the 3rd-Wave of a reversal lower that's gonna be the market's clear signal of an impending Fed tightening.  Either of these counts may be made very obvious moments after tomorrow's key non-farm payroll report at 8:30 ET.

For the time being and as a direct result of last week's resumed losses, at least the intermediate-term trend is down and should not surprise by its continuance or acceleration.  Former 131.00-area support would be expected to hold as new resistance if something bigger to the bear side is brewing.  29-Aug's 131.00 and 22-Aug's 131.09 corrective highs are considered our new micro- and short-term risk parameters from which shorter-term traders with tighter risk profiles can rebase and manage the risk of an advised cautious bearish policy and exposure.

10 yr Treasury Daily

Broker Daily

The daily log close-only chart above of actual 10-yr yields shows an identical but inverted technical construct to that detailed above for the Dec contract.  At least the intermediate-term trend in yields is clearly up until and unless rates fail below at least 22-Aug's 1.542% corrective low.  This said, former huge rate support between 1.64% and 1.74% still serves as key new resistance the market needs to break above to confirm a major base/reversal environment in rates and peak/reversal in the contract.  In effect the market has identified 29-Jul's 1.45% low and the 1.75%-area as the KEY directional triggers around which a very long-term policy can be toggled.

Broker Weekly

BEARISH SPEC:  OCT 130-1/4 - NOV 129.00 PUT DIAGONAL

Noting the violence and volatility with which this market often times reacts to the key monthly unemployment report, obviously a more conservative approach to risk assumption is warranted if one wants to get a good night's sleep tonight.  Both the options strategies below are not only safe, conservative ways to engage this key report, they provide ample profit potential if the market moves sharply in the intended direction.

The put diagonal involves buying 1-unit of the Oct 130-1/4 Puts around 30/64s and selling 1-unit of the Nov 129.00 Puts around 24/64s for a net cost of 6/64s ($93.75 per 1-lot play).  This put diagonal spread provides:

  • a current net delta of -0.14
  • gamma ratio of 2:1
  • negligible risk if the market rallies sharply
  • profit potential of 1.25-pts ($1,250) on a sustained decline below 129.00

As always with long-gamma diagonal spreads, tame, lateral, boring price action is its biggest enemy as time decay, or theta, works against the long front-month option more than the deferred-month option.  But with over three weeks left to expiration of the Oct puts, we'll have plenty of time to assess the market's directional resolve in the days following tomorrow's report before theta becomes a problem.  In the meantime bearish owners of this spread will have the opportunity to profit handsomely on a sharp reaction lower to the nonfarm payroll report with negligible risk if the market explodes higher.

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BULL SPEC:  OCT 130-1/4 - NOV 132.50 CALL DIAGONAL

This call diagonal involves buying 1-unit of the Oct 131-1/4 Calls around 22/64s and selling 1-unit of the Nov 132.50 Calls around 17/64s for a net cost of 5/64s ($78.12 per 1-lot play).  This call diagonal spread provides:

  • a current net delta of +0.18
  • gamma ratio of a little less than 2:1
  • negligible risk if the market collapses per our preferred technical count
  • profit potential of 1.25-pts ($1,250) on a sustained recovery above 132.50

Here too, time decay is this call diagonal spread's biggest enemy if tomorrow's report proves to be a dud and the market simply flat-lines in the weeks ahead.  But with over three weeks left to expiration of the Oct calls we'll have plenty of time to assess the market's directional resolve in the days following tomorrow's report before theta becomes a problem.  In the meantime bullish bearish owners of this spread will have the opportunity to profit handsomely on a sharp reversal high resulting from tomorrow's nonfarm payroll report.

Please contact your RJO representative for updated bid/offer quotes on these strategies.

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