How FX options can affect spot price heading in to expiration

Beginner Questions
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This may be a bit advanced for newbies so if feel free to post up any questions (no matter how noob). This discussion will be based on plain vanilla american-style options for the FX market which expire daily at 10am NY time. There are options like European, exotics, and all on a decentralized FX market so this is never a simple thing to understand :slight_smile:

With that said… If spot price of a security is close enough to a large vanilla option heading in to the NY cut (10am in New York or 1400 GMT), it will often act as a magnet from selling taking place above strike and buying done below. The order flow generated could be from banks hedging as price approaches a strike where their clients will need to be paid out, or from large option holders exercising their right to buy/sell after price as gone in-the-money which could send price back past the strike level. There are two sides that need to trade, and if the option is large enough, there will be enough trading done to actually move the market.

Its important to note that after the 10am NY option cut, that day’s options will expire and the gravitational pull it had won’t be there anymore.

Here’s an example of Eur/Usd’s price action on Sept 26th… News of a large option expiring today Large options for today’s NY (10:00am ET) cut: EURUSD at 1.3500 from Forex dealers, and how price reacted:

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That Eur/Usd option was worth over “1 yard”, 1 yard=1 billion US$. Large options that have a big affect will usually be over $500million or ‘half a yard’. Keeping up with whats going on in your chosen market can save a great deal of guessing and can really give you the advantage to trading against uninformed traders :wink: I’ve been using this free news feed for order info as of late: Order Flow Trading News
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Here’s the Gbp/Usd on Oct 4th reacting to a large option at 1.6050: GBPUSD option expiry at 1.6050 for today’s NY cut

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EE

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This is good stuff ^

I’ve definitely seen the effects that these vanilla options have on the markets. It’s really funny actually to watch smaller news come out around 8:30 ET that you think would have an affect but not do much - instead it hovers around a certain price. Then 10:00 ET hits and BAM it starts moving toward the way you think it should have haha.

Doesn’t seem to do much during otherwise really busy markets, though. So if big news is already hitting and activity is going crazy, the guys trying to keep price near their option strikes won’t want to put up the resources to fight through all those orders. Overall it makes it a lot harder for them to keep price locked so they just don’t bother at all.

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Keenly interested. Post up more examples when you run across them!

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Looks like there’s a large option & barrier option on Aud/Usd @ .9550

Large AUD/USD option at 0.9550 capping the pair for now

AUDUSD- offers seen ahead of .9550 barrier

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Offers under .9550, buy stops above it.

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Hahah those binary options are even more fun to watch get attacked and defended. Stops that get put past them clear nice and strong after they’ve built up so well. The side trying to defend the option has no need to hold onto those accumulated positions, so they tend to tighten up their stop just past the barrier. Combine that with everyone who saw the ‘support’ or ‘resistance’ level from them defending it who’ve put their stops past it…good times to watch go down :stuck_out_tongue: