Day Trading Volatility.

*Taking a look at a recent day trade on VIX and looking at the U.S. NFP data and its effects*

Welcome back to the blog, I hope you have all had a great trading week so far and are heading in to the weekend with profits secured and a better person than when you started on Monday. In this post I am going to show a recent short duration day trade position I entered on the CBOE VIX futures and how it coincides with the U.S. Non-Farm Payroll (NFP) employment data.

Non-Farm Payrolls (NFP) is the measure of the number of workers in the U.S. excluding farm workers and workers in a handful of other job classifications. In addition to farm workers, nonfarm payrolls data also excludes some government workers, private households, proprietors, and non-profit employees.

Interestingly, most traders believe that NFP data is always released on the first Friday of every month however what is not common knowledge as that this is not actually always the case. The Bureau of Labor Statistics releases preliminary data on the third Friday after the conclusion of the reference week, i.e., the week which includes the 12th of the month, and typically (but not always) this date occurs on the first Friday of the month.

November 20 VIX futures short trade.

Trading volatility (futures) is basically buying or selling an asset that will increase in value if the implied volatility of the stock market (based on the S&P500 index) increases. The implied volatility of the stock market and the VIX is calculated from S&P500 options prices. Another explanation of the VIX is that it is a measure of investors fear.

When I short VIX futures I am betting that stock market volatility will decrease in the future and therefore I borrow some futures contracts from my broker at one price and then hope to buy them back at a lower price in the future, return the contracts to the lender and keep the difference price difference as profit.

I have explained the mechanics of a short trade and how they work in a previous blog post which can be found via clicking on the link below.

VIX NOV20 futures – short trade.

The chart above shows a recreation of my short trade position entered on Friday 6th November prior to the NFP data release. I entered short around 15 minutes before the data came out with a stop loss above the near price highs and two price targets (position exists) marked on the chart for reference.

A lot of retail traders/new traders are scared of trading through NFP and treat it as some sort of mythical volatility creator that hits stop loss orders and causes losses. From my experience, this is not correct if you do two things.

  1. Know what markets to trade.
  2. Don’t trade aggressively and stick to your rules.

I have personally traded through 10 of the 11 NFP data releases this year and had winning positions on 70% of those trades with a positive reward:risk ratio on all of them.

Trade management of my short trade on VIX was simple as I have 2 rules. I take profits at 2R when my profit reward:risk ratio is then positive and I hold the remainder of my position until just before market close on that day. I do not hold any positions over the weekend because I am trading momentum and daily market sentiment and this can soon disappear overnight.

November 2020 NFP data.

Monthly NFP data 2020

This months NFP employment data was the 5th consecutive month of positive numbers showing a recovery in the U.S. labour market after the damage caused by the initial hit of the coronavirus pandemic. However, as we all know, it is not so much the positive or negative nature of data that moves markets in the short term but instead what the actual data is compare to what was expected by traders.

November’s NFP data release was the first since August to be better than expected and that creates an increase in confidence amongst traders and investors which in turn reduces implied volatility (fear) in the stock markets. And that is why VIX futures fell in value.

However, not all is rosy with the U.S. labour market and there are still some points of concern when looking at the larger picture.

From Oxford Economics.

As you can see from the chart above, although month on month employment levels seem to be improving, employment is still more than 10 million lower than pre-covid and this is set to increase. Economic growth is slowing in the U.S. and as of this week they have announced another series of lockdowns (10pm curfews on restaurant and bars) in trouble areas including large cities like New York. This will no doubt have an impact on employment.

Below are some more detailed charts on the employment data released last Friday. Enjoy!

If you are a regular reader of my blog you will know about my Trading Market Volatility series of blog posts. These explained the VIX, volatility and trading volatility in more detail and I even showed a few of my other short duration VIX day trades. If you haven’t read these blog posts then you can find them via the links below.

If you are interested in learning my personal trading strategies, please consider my Mastering The Markets – Retail Trading Course. Head over to my Trading Education page to check out all of my education packages and the deals available.

Useful Links:

All my technical analysis is done using the TradingView platform. You can get access via the link below.

My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.

FTMO Trader Funding Programme.

Thanks for reading and please don’t forget to LIKE, SHARE and FOLLOW my blog to stay up to date with the latest market analysis and trading education posts.

DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.

%d bloggers like this:
search previous next tag category expand menu location phone mail time cart zoom edit close