This weekend’s EU Summit is going to be dangerous for trading because markets will be closed and any big news will likely see price gaps on the Sunday night open. Here’s our brief of how best to trade it
- Two big ticket items up for discussion – EU rescue fund & EU budgets.
- There’s been large options activity surrounding the summit.
- We’ve seen a lot of activity in 1 week & 1 month expiries, and explicitly for expiry on Monday.
- Currently over 6 yards off between 1.1350 & 1.1400 for Monday.
- The added summit pricing activity increases the risk (and potential size) of a gap open.
- Summit risk is 50/50 of going either way, hence a high gap price risk.
- Safest way to trade it looks to be buying OTM Calls & Puts at maybe 50/75 pips away from spot near to the close, on maybe a minumum 1 week expiry.
- Depending on the broker, that should cost (premium) between 25-40 pips each.
- FYI for less experienced traders, holding options limits your risk to the cost of the premium while allowing you to benefit from a gap either way.
- Cavaet – Strategy is only really beneficial on a big gap move.
- But, even if there’s no gap, there’s still time before expiry to trade the out the positions for a small profit or smaller loss.
- Beware – Holding s/t EUR trades into the weekend is a big risk. It’s a pure gamble which way the summit might go.
- To mitigate that risk, one can decide to close s/t positions before the close and re-open them again Monday if nothing has changed.
- The most sensible plan for most traders would be to not trade into the weekend and see how things develop.
Here at ForexFlow, we’ve been assessing the risk, and analysing the trading plans for the summit all week. From the information we get everyday from the market we’ve been able to see how the market is set up and where the bias is, and thus how it will trade or unwind positions when markets re-open.
If you’d like to know the finer details of the markets positioning, and how we think that will affect the market based on several outcomes, feel free to join us here.