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Surfing the Jobs Report: Why It Matters and Strategies for Trading It

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.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Surfing the jobs report with options and futures strategies
5 min read
Photo by Getty Images

Key Takeaways

  • The U.S. Employment Situation report (aka the jobs report) can often be accompanied by elevated market volatility
  • Measuring actual jobs numbers against anticipated numbers is a key to trading or hedging against the report’s market impact
  • There are plenty of equities- and derivatives-based strategies you can consider using to trade volatility (whether low or high) following the jobs report

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.

What Is the Jobs Report?

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?

Look Ahead and Watch Out for Big Numbers

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?

Trading an Expected Low-Volatility Outcome

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.)

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.

Trading an Upside or Downside Move

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.

Be Wary of Key Technical Levels During a Large Jobs Beat or Miss

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.

The Bottom Line: Surf’s Up—First Friday of the Month

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. 

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Key Takeaways

  • The U.S. Employment Situation report (aka the jobs report) can often be accompanied by elevated market volatility
  • Measuring actual jobs numbers against anticipated numbers is a key to trading or hedging against the report’s market impact
  • There are plenty of equities- and derivatives-based strategies you can consider using to trade volatility (whether low or high) following the jobs report

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