How To Straddle USD/CAD For Canadian Rate News Release

Similar to the United States’ Federal Open Market Committee meeting and rate announcements, Canada’s Bank of Canada will be releasing the Monetary Policy Report, Rate Statement, and Overnight Rate. The three reports will all be out on Wednesday at 10:00 a.m. ET, and are high impact numbers that can move USD/CAD. This makes for an opportunity to use a straddle strategy.

This Straddle strategy uses Nadex USD/CAD spreads, one long and one short. The strategy is used when it is anticipated the market will make a significant move. The bought spread’s floor should be where the market is trading. The sold spread’s ceiling should meet the bought spread’s floor and also be where the market is trading. For this trade, based on previous market movement after the news announcement, the combined risk should be no more than $40, or around $20 per spread.

Entry for this trade can be as early as 9:00 a.m. ET for the two-hour expiring 11:00 a.m. ET spread. The risk is low for straddles and typically stops aren’t necessary. What is necessary though, are take-profit orders. The trick to know where to place the take-profit order on a straddle is to double the total risk. If for this trade the max risk is $40, then the take-profits should be placed 80 pips up and and 80 pips down. That is where the trade would cover the cost of the trade and make $40 profit.

For example, say the market took off and went long. Once it is up 20 pips, the trade is breakeven on the upper spread, but with a loss of $20 on the lower spread. When the market is up 40 pips, then the straddle has made $20 on the upper spread and still has a loss of $20 on the lower spread leaving the trade at breakeven. If the market moves up 60 pips, then the top spread now has $40 profit but still has the $20 loss of the bottom spread for a $20 profit total. When the market hits 80 pips up, the long spread makes $60, the short spread has the loss of $20 and the Straddle trade has now made $40 total in profit.

After one spread has profited, the trader should still leave the other spread on. The market may pull back far enough to reduce the $20 loss of the other spread and even profit.