Movement in Nonfarm Payroll Futures?

Includes: CBOE, CME
by: World Market Pulse

The Nonfarm payroll report released Friday had an added significance as it was the last before the Nov. 2 midterm elections. Another disappointing report would make it even harder for President Barack Obama to convince Americans that Democrats deserve to keep control of Congress in next month's elections. The report however was largely on expected lines as the Nonfarm payroll employment edged down (-95,000) in September, and the unemployment rate was unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today. Government employment declined (-159,000), reflecting both a drop in the number of temporary jobs for Census 2010 and job losses in local government. Private-sector payroll employment continued to trend up modestly (+64,000).

Although the Labor market weakening is hobbling the economy's recovery, and the employment report could determine whether the Federal Reserve will ease monetary policy further, traders are waiting to see if the September reports can trigger off some interest and generate some volumes in the Nonfarm Payroll futures at the CME.

Non Farm Payroll Futures:

While the vital Nonfarm payroll statistics and numbers are considered key economic data, one can also trade in nonfarm payroll futures and future options for speculation or risk management, which as per the Chicago Mercantile Exchange is a "transparent, straightforward and direct exposure to the government labor number." NFP futures and options are an accessible way to gain direct exposure to the government labor number or to offset unexpected financial market moves that often occur when this number is released. But can nonfarm payroll databased futures and options foretell the future of broader markets?

$25 for each 1000 jobs added or lost?

Nonfarm Payroll (NFP) futures and options on futures, offered by the CME, are designed to coincide with the release of the NFP economic data each month (typically the first Friday of the month). These plain vanilla contracts are based on the monthly U.S. Bureau of Labor Statistics report that measures employment health. As it is the first major economic release each month that speaks to the condition of the prior month, the NFP is closely followed as a way to gauge how the Federal Open Markets Committee perceives economic growth.

How to play NonFarm Payroll Futures

For each 500 jobs move, trader can earn $12.50 or 1000 jobs and $25.

Futures Symbol : NFP + Month+Year
Quoted in 500 jobs or minimum fluctuation of 0.5 (=$12.50)
Each minimum price fluctuation of 1 point (1,000 jobs) = $25.00
There is a Price limit of ±200 points (200,000 jobs = $5,000) applied to final settlement price from previous business day’s price settlement.

Future Options:

American-style options may be exercised into one (1) futures contract
Established at 10 point (or 10,000 jobs) intervals from -500,000 to +500,000 jobs
Movement in value of a call (put) is effectively capped (floored) by virtue of price limit applied to futures contract.

NFP futures and options are listed exclusively on the CME Globex electronic trading platform, Sundays through Thursdays from 5:00 p.m. to 4:00 p.. Central Time (CT) next day. One contract is listed at a time and each contract is listed on the Monday after the previous month’s release. Trading in the expiring contract concludes at 7:25 a.m. CT on the day that the U.S. Bureau of Labor Statistics releases its Nonfarm Payroll report. Each contract valued at $25 times the change in the Nonfarm Payroll number from the previous month is a way to hedge and speculate for savvy investors and sharp traders.

Disclosure: No positions