U.S. New Home Sales Report Offers Trading Opportunity

On Wednesday, February 25, 2015, U.S. New Home Sales numbers will be released offering a trading opportunity. Trading news events can be tricky in that the trader doesn’t know which way the market will go or how it will react.

The way to find effective strategies to trade them is to go back and look at the history of the reaction of the market after the news event and see if there were any consistent moves.

The Market Can Stay Where It Is and The Trade Will Profit

For this report it was determined that an Iron Condor using Nadex Spreads is an effective strategy to trade the EUR/USD. Analysis determined that the U.S. New Home Sales report tends to make the EUR/USD react and move a small amount and then pull back.

An Iron Condor, being a neutral strategy allows the trader to collect premium which essentially means the market can do nothing or move a small amount in either direction and the trade can still be profitable.

Implied volatility is expected movement built into the price. This is important because for this Iron Condor strategy you need to find spreads that will provide a profit potential of $30 or more.

There may or may not be enough implied volatility or expected movement in the price for you to find that minimum in which case you have no trade. You can use Nadex spreads and enter as early as 9:00 AM for an 11:00 AM expiration.

To set up an Iron Condor, you want to buy the lower spread with the ceiling being where the underlying market is trading currently.

You also want to sell an upper spread with the floor being where the underlying market is trading currently. The two spreads combined should have a $30 profit potential or more. Remember if $30 doesn’t seem like a lot of profit to you, you can always trade more contracts.

The Market Can Move 60 Ticks Up or Down for a 1:1 Max Risk to Reward Ratio

Once the news is reported the market will move and most likely pull back. If the market returns to the center between your spreads, where the floor and ceiling come together, that will bring you maximum profit.

The profit amount reduces by $1 for every tick the underlying market is away from that center. For example, if you sold your upper spread 15 ticks above the underlying and you bought your lower spread 15 ticks below the underlying, then your max profit would be $30 at expiration, if the market returned and expired in the center.

If the market moved up 15 ticks from the center, your bought spread would have +15 profit and your upper spread would be break even so you would have a total profit of +15.

You would have the same total profit of +15 if the market went down 15 ticks. For a break even on the trade, the market could move 30 ticks up or 30 ticks down, and for a 1:1 max risk to reward ratio, the market could move 60 ticks up or 60 ticks down for a range of 120 ticks.

To manage this strategy it is recommended to leave the spreads on until expiration. If you decide to exit one side be sure to exit the other side at the same time.

A news calendar with strategies is available at www.apexinvesting.com.