Large Moves Expected for Friday’s Unemployment Report

Tomorrow, the market will focus on the release of the U.S. unemployment report, arguably the most crucial economic data point in the near term. The anticipation surrounding this report is reflected in the options market, signaling heightened volatility as traders brace for the announcement. While international events have made headlines, this unemployment number remains the key to shaping market sentiment and guiding Federal Reserve policy.

The unemployment number provides:

• Critical insights into the state of the U.S. labor market.

• Serving as an indicator for future economic growth.

• Inflation trends.

• Potential monetary actions by the Fed.

As such, traders are already positioning themselves for what could be a significant move in the market following the release.

In an environment where inflation concerns continue to weigh heavily on investors' minds, unemployment is one of the most influential metrics in determining the Federal Reserve's next steps. A higher-than-expected unemployment rate may signal that the economy is slowing, reducing the likelihood of further rate hikes. On the other hand, a lower unemployment number could reignite inflation fears and lead to tighter monetary policy.

Given the centrality of this report, traders have been adjusting their positions accordingly. As we reported to The Wall Street Journal, SPY is currently pricing in a 1.0% move for tomorrow, a slight reduction from the 1.1% move expected two days ago. The other major ETFs, QQQ and IWM, show expected moves of 1.2% and 1.7%, respectively, as traders prepare for the report's impact on the tech and small-cap sectors.

While these expected moves are slightly lower than earlier in the week, the market's focus on the unemployment data remains clear. The implied volatility for October 4th options is still elevated compared to other expirations, signaling the importance of this data release.

The options market provides a direct window into trader sentiment ahead of major events like the unemployment report. By analyzing implied volatility and expected moves, we can gain insights into traders' positioning for the upcoming announcement.

At ORATS, we use straddle pricing to calculate an event's expected move. We begin by determining the price of a long straddle, which involves buying both a call and a put option at the same strike price for the expiration immediately following the event (in this case, October 4th). This straddle price reflects the market's overall expectation for volatility.

Next, we estimate the residual value of the straddle after the unemployment announcement using a custom distribution model we've developed specifically for event-driven data like this. The difference between the original straddle price and its post-announcement value gives us the expected move—in this case, 1.0% for SPY. This represents how much the market anticipates SPY could move once the unemployment data is released.

ETF Expected Move After Unemployment

SPY 1.0%

QQQ 1.2%

IWM 1.7%

As shown in the table, the expected move for SPY is 1.0%, while QQQ and IWM are pricing in slightly larger moves. This reflects the market's focus on how the unemployment report will affect different sectors. The tech-heavy QQQ tends to react more sharply to macroeconomic data, particularly regarding Fed policy. Meanwhile, IWM, which represents small-cap stocks, is often more volatile due to the inherent risks in smaller companies.

The slight reduction in expected moves over the past few days suggests that some of the market's fear surrounding this report may have dissipated, but that doesn't mean the unemployment data won't trigger a notable reaction. Elevated implied volatility, particularly for the October 4th options, indicates that traders are preparing for a significant move.

In addition to the implied volatility metrics, volume for the October 4th options is noticeably higher, underscoring the market's focus on this event. Traders are likely hedging their positions or making directional bets based on expectations for tomorrow's report. Higher volume in the options market ahead of such events often signals increased activity and the potential for larger-than-usual market swings.

Each dot on the chart represents the implied volatility of individual strikes, with purple dots for puts and cyan dots for calls. ORATS' smoothing process, depicted by the orange line, helps to clarify the skew in implied volatility, showing where mispricing or market imbalances may exist. The quality of analysis allows traders to identify opportunities based on volatility trends and positioning ahead of the report.

As we head into the unemployment report tomorrow morning, traders should be prepared for increased volatility across the major indices, particularly in SPY, QQQ, and IWM. With a 1.0% move priced into SPY, and higher expected moves in other sectors, the unemployment data will likely set the tone for market activity in the coming days.

Traders looking to hedge risk or capitalize on volatility should consider strategies like straddles, vertical spreads, or iron condors to navigate these conditions. With the market placing significant importance on this report, the potential for outsized moves remains high, making this an event that no trader can afford to ignore.