CME: Euro FX (
6E1!
), NYMEX: WTI (
CL1!
)
Since I joined the TradingView community two years ago, I have discussed numerous trade ideas based on event-driven strategies. Below is my all-time favorite.
Russia and Ukraine together account for 28% of the wheat export market. Their military conflict started in February 2022 threatened global wheat supply, pushing wheat prices up by 75% within weeks.
On June 22th 2022, I experimented a Long Straddle Options Strategy on CBOT Wheat Futures in this TradingView commentary
• Viewing geopolitical crisis as a market moving event, I categorized its future outcomes as binomial, being “Risk On” or “Risk Off”.
• Call options on Wheat futures would gain in value if the conflict escalated, where Put options would profit in a cease-fire scenario.
Today, let’s take a look at two event-driven trades I have crafted, followed by a step-by-step guide to set up the hypothetical trade.
First case: On May 27th, I posted “Event-Driven Strategy using WTI Weekly Options”.
• Using the June 2nd OPEC+ meeting as a market moving event, I considered the outcomes binomial, being “Within Expectation” and “Exceeded Expectation”.
• CME Group OPEC Watch Tool indicated a high probability of the OPEC+ maintaining its output quotas. This was the prevailing market expectation.
I expected the crude oil market to react calmly if OPEC+ made no changes. To express this view, I experimented simultaneously selling an Out-of-the-Money (OTC) Call and an OTC Put Options on WTI crude oil futures (
CL
). The trader would deposit $6,001 margin and collect $460 premium upfront. These weekly options expired in 12 days on June 7th.
• OPEC+ made no changes in output level on June 2nd.
• During the duration of the options contracts, oil prices never went above our call strike of 82.8 or dipped below our put strike of 72.8.
• After market close on June 7th, the clearing house would release the margin back to the trader, as the options he sold expired worthless.
• The $460 premium the trader collected upfront became the profit of this trade.
Second case: On June 12th, I posted “Euro to Weaken as the ECB Pushes Rate Cuts Forward”.
Based on the Interest Rate Parity (IRP) theory, the interest rate spread between the US Fed Fund rates and the European Central Bank key rates is considered the main driver for Euro-USD exchange rate.
Each Fed meeting and the ECB rate setting meeting will be market moving events, which will influence the relative value of the Euro against the Dollar.
In my opinion, the ECB will cut rates more frequently than its US counterparts, leading the Euro depreciation. To express this view, I propose to Short the Euro-FX futures.
• On June 12th, the September (6EU4) Euro-FX contract quoted 1.08605. Each contract has a notional value of €125,000. CME requires an initial margin of $2,100.
• On June 12th, the Fed decided to keep the Fed Funds rate unchanged at 5.25%-5.50%.
• On June 16th, 6EU4 is quoted at 1.07465. The 114-pip drop in Euro futures price will translate into a gain of $1,425 (= 114 x $12.5) in the short position.
The next ECB Governing Council meeting is on July 18th. The next Fed meeting is on July 31st. CME Group FedWatch Tool shows an 87.6% probability of the Fed keeping interest rate unchanged. If the ECB continues to cut rates, I expect the Euro to fall further.
Event-Driven Trade Setup for Novel Traders
Firstly, find a major event with a magnitude to move the global market.
Examples are Fed and ECB rate-setting meetings, releases of US CPI data and nonfarm payroll reports, OPEC+ meeting, the US-China trade conflict, the COVID pandemic, and the Russia-Ukraine conflict.
Secondly, analyze the event impact and define it into binary outcomes. These outcomes must be mutually exclusive and collectively exhaustive (MECE). Examples:
• The 2022 US Mid-term election: House controlled by Republican or Democrats.
• The 2023 Debt ceiling crisis: Resolved or Not Resolve.
• Spot Bitcoin ETF: SEC approval or denial.
• The trial of the former US president: Guilty or Not Guilty.
If there are too many outcomes, it would be difficult to construct a trading strategy.
Take the 2024 US presidential election as an example, it has two possible outcomes: Democrat Win or Republican Win.
Thirdly, search and identify financial instruments that are most affected by the event.
For example, ECB meeting to Euro-USD exchange rate, OPEC+ meeting to WTI crude oil, Fed meeting to US stock market indexes. If market prices did not respond to event outcomes, then this is not the right instrument to use.
Finally, set up the trade.
• In a scenario where one outcome pushes the prices up and the other outcome drags the prices down, we could consider Long Futures or Call Options to express a bullish view. Similarly, Short Futures or Put Options position would signify a bearish view.
• Futures and options come with leverage. They are a capital efficient way to invest.
• In a different scenario, one outcome would increase short-term market volatility, but the other outcome will be received by muted reaction. In the latter, if we expect the market to move sideways, we could sell short-dated options to collect premium income.
For our discussion in the next week:
The first US presidential debate will be held on CNN on June 27th. This is a major event as the candidates’ performance will play a big role into voters’ decisions in November. Now I have a question for my readers:
What financial instruments would be impacted the most by the debate? Specifically, what prices would go up for a perceived win by former President Trump, and what would fall if the approval rate rose for President Biden after the debate?
Please leave your comments below. Thanks in advance for your support.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
6E1!
), NYMEX: WTI (
CL1!
) Since I joined the TradingView community two years ago, I have discussed numerous trade ideas based on event-driven strategies. Below is my all-time favorite.
Russia and Ukraine together account for 28% of the wheat export market. Their military conflict started in February 2022 threatened global wheat supply, pushing wheat prices up by 75% within weeks.
On June 22th 2022, I experimented a Long Straddle Options Strategy on CBOT Wheat Futures in this TradingView commentary
• Viewing geopolitical crisis as a market moving event, I categorized its future outcomes as binomial, being “Risk On” or “Risk Off”.
• Call options on Wheat futures would gain in value if the conflict escalated, where Put options would profit in a cease-fire scenario.
Today, let’s take a look at two event-driven trades I have crafted, followed by a step-by-step guide to set up the hypothetical trade.
First case: On May 27th, I posted “Event-Driven Strategy using WTI Weekly Options”.
• Using the June 2nd OPEC+ meeting as a market moving event, I considered the outcomes binomial, being “Within Expectation” and “Exceeded Expectation”.
• CME Group OPEC Watch Tool indicated a high probability of the OPEC+ maintaining its output quotas. This was the prevailing market expectation.
I expected the crude oil market to react calmly if OPEC+ made no changes. To express this view, I experimented simultaneously selling an Out-of-the-Money (OTC) Call and an OTC Put Options on WTI crude oil futures (
CL
). The trader would deposit $6,001 margin and collect $460 premium upfront. These weekly options expired in 12 days on June 7th. • OPEC+ made no changes in output level on June 2nd.
• During the duration of the options contracts, oil prices never went above our call strike of 82.8 or dipped below our put strike of 72.8.
• After market close on June 7th, the clearing house would release the margin back to the trader, as the options he sold expired worthless.
• The $460 premium the trader collected upfront became the profit of this trade.
Second case: On June 12th, I posted “Euro to Weaken as the ECB Pushes Rate Cuts Forward”.
Based on the Interest Rate Parity (IRP) theory, the interest rate spread between the US Fed Fund rates and the European Central Bank key rates is considered the main driver for Euro-USD exchange rate.
Each Fed meeting and the ECB rate setting meeting will be market moving events, which will influence the relative value of the Euro against the Dollar.
In my opinion, the ECB will cut rates more frequently than its US counterparts, leading the Euro depreciation. To express this view, I propose to Short the Euro-FX futures.
• On June 12th, the September (6EU4) Euro-FX contract quoted 1.08605. Each contract has a notional value of €125,000. CME requires an initial margin of $2,100.
• On June 12th, the Fed decided to keep the Fed Funds rate unchanged at 5.25%-5.50%.
• On June 16th, 6EU4 is quoted at 1.07465. The 114-pip drop in Euro futures price will translate into a gain of $1,425 (= 114 x $12.5) in the short position.
The next ECB Governing Council meeting is on July 18th. The next Fed meeting is on July 31st. CME Group FedWatch Tool shows an 87.6% probability of the Fed keeping interest rate unchanged. If the ECB continues to cut rates, I expect the Euro to fall further.
Event-Driven Trade Setup for Novel Traders
Firstly, find a major event with a magnitude to move the global market.
Examples are Fed and ECB rate-setting meetings, releases of US CPI data and nonfarm payroll reports, OPEC+ meeting, the US-China trade conflict, the COVID pandemic, and the Russia-Ukraine conflict.
Secondly, analyze the event impact and define it into binary outcomes. These outcomes must be mutually exclusive and collectively exhaustive (MECE). Examples:
• The 2022 US Mid-term election: House controlled by Republican or Democrats.
• The 2023 Debt ceiling crisis: Resolved or Not Resolve.
• Spot Bitcoin ETF: SEC approval or denial.
• The trial of the former US president: Guilty or Not Guilty.
If there are too many outcomes, it would be difficult to construct a trading strategy.
Take the 2024 US presidential election as an example, it has two possible outcomes: Democrat Win or Republican Win.
Thirdly, search and identify financial instruments that are most affected by the event.
For example, ECB meeting to Euro-USD exchange rate, OPEC+ meeting to WTI crude oil, Fed meeting to US stock market indexes. If market prices did not respond to event outcomes, then this is not the right instrument to use.
Finally, set up the trade.
• In a scenario where one outcome pushes the prices up and the other outcome drags the prices down, we could consider Long Futures or Call Options to express a bullish view. Similarly, Short Futures or Put Options position would signify a bearish view.
• Futures and options come with leverage. They are a capital efficient way to invest.
• In a different scenario, one outcome would increase short-term market volatility, but the other outcome will be received by muted reaction. In the latter, if we expect the market to move sideways, we could sell short-dated options to collect premium income.
For our discussion in the next week:
The first US presidential debate will be held on CNN on June 27th. This is a major event as the candidates’ performance will play a big role into voters’ decisions in November. Now I have a question for my readers:
What financial instruments would be impacted the most by the debate? Specifically, what prices would go up for a perceived win by former President Trump, and what would fall if the approval rate rose for President Biden after the debate?
Please leave your comments below. Thanks in advance for your support.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
Jim W. Huang, CFA
jimwenhuang@gmail.com
jimwenhuang@gmail.com
