EUR/USD trade idea: buying a long straddle over eurozone GDP figure

Gross domestic product (GDP) is a comprehensive measure of economic output for a country or region, with many traders using it to influence their trade decisions. Generally, this macroeconomic figure can be well-anticipated, given the individual components which make up GDP are known beforehand, however this isn’t always the case. Any figure which falls outside what was anticipated can cause volatility in related markets, especially given the significance of the figure.

In this example we’ll look at the eurozone GDP figure which is released today at 10am, and the impact which that could have on EUR/USD.

If you think there is going to be volatility in the market over a key data release such as this, then you may want to consider a long straddle options trade using our daily options.

A note about options

It’s worth noting that this trade idea assumes an understanding of what options are, and how you trade them with IG Bank, as well as payoff diagrams for options, how they settle, and profit and loss calculations. You may also want an overview of how to use the options chain.

Options are more complex then trading regular spot markets so it’s important to understand the product fully.

Buying volatility

If you think there is going to be volatility in a particular market, but you don’t know the direction of the market there is an options strategy which you can use to your advantage – a long straddle.

A long straddle is the process of buying a call and buying a put at the same strike ‘at the money’. If the market moves outside of the two bought premiums (up or down) then the trade will be profitable. If the underlying market stays within the range of the two premiums added together then it would be a losing trade.

Placing the trade using the IG options chain

In this trade example we are assuming you:

• Understand how options work, and that buying options will always be limited risk
• Think that the eurozone GDP figures will cause volatility in the market. If you don’t think there will be volatility in this market, then you wouldn’t trade a long straddle
• Don’t have a preference on direction, but just believe EURUSD will be volatile

To open a long straddle on EUR/USD in the IG platform:

• Open the options tab from the left-hand flyout on the platform
• Select EUR/USD with a daily expiry
• Prior to the data release, buy a call and a put at the same strike which needs to be ‘at the money’ (denoted by the black line across the middle of the options chain)
• In this example that would be a 10840 strike call with a premium of 11.4, and put with a premium of 10.6. Obviously, the markets and corresponding options premiums update continuously so the below should only be used for illustrative purposes

If the underlying market moved by more than the proposed amount, then this trade would be profitable. If the move wasn’t as volatile and EUR/USD didn’t move more than the two premiums added together (22 points) then the trade wouldn’t be profitable at expiry.

Don’t forget you can hold this trade until expiry, even if it’s worthless, with volatility throughout the day still potentially impacting the profitability of the trade. For EUR/USD this will settle basis the mid-point of the IG Bank spot price at 21:00 Swiss time, with the last dealing time being a minute before then.