Economic events can create some of the most compelling trading environments of the year – sharp, news-driving moves with defined timelines. Inflation reports, jobs data, and Federal Open Market Committee (FOMC) decisions can move markets, and with the right tools, like options, they can be traded with similar precision and defined risk that equity traders apply to earnings.
Example
A trader expecting significant market volatility around an FOMC rate decision could buy call and put options on the S&P 500 Index (SPX®) to create a straddle strategy. If SPX was trading around 7,500, the trader would want to buy the 7,500 call and 7,500 put using a weekly expiration timed just after the announcement. The trade could profit from a large price move in either direction, provided the underlying’s price move surpasses the total premium paid for the position.
Cboe offers weekly and daily expirations for S&P 500 Index options (SPX), making it straightforward to align trade duration precisely with the event window. For traders who prefer smaller notional exposure, Mini-SPX Index options (XSP®) options, which are one-tenth the SPX options contract size, offer additional strategic opportunities with more flexible position sizing.
Choose what you're trading: direction, magnitude, or neither
One of the core advantages of options is the ability to isolate specific variables, though every strategy carries its own risk profile that should be weighed against its potential benefit. Below are the benefits and risks of some common strategies:
- Straddles and strangles — profit from a large move in either direction, but risk the total premium paid if the underlying doesn't move enough to cover the cost of both options
- Short straddles and iron condors — profit if the market moves less than implied volatility suggests, but carry substantial — and, for an uncovered short straddle, potentially undefined — risk if the market moves sharply against the position
- Directional spreads — express a view on the likely direction of a move or a range, though an incorrect view can result in the loss of some or all the premium paid
This flexibility is especially powerful around economic events, where the timing of the catalyst is known.
Example
A trader believes the upcoming Non-Farm Payroll (NFP) report will have less market impact than implied volatility is currently pricing in. Rather than picking direction, the trader wants to sell volatility.
Using SPX weekly options expiring the Friday of the NFP release, the trader sells an at-the-money straddle. If SPX was at 7,500, they could sell the 7,500 call and 7,500 put, collecting a net premium. The strategy profits if SPX stays within the breakeven range at expiration, with maximum profit realized if SPX settles exactly at 7,500. Breakeven points are defined when the trade is placed, based on the premium collected, while upside and downside risks increase as SPX moves further away from the strike. It is worth noting that the max risk to the downside is significant but limited whilst the max risk to the upside is theoretically unlimited.
Economic events provide traders with a year-round calendar of known catalysts. Rather than predicting every market outcome, options can help traders express a view on direction, volatility, or range-bound price action while defining risk in advance.
Explore SPX and XSP options for your next economic-event trade.
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