How FX options can affect spot price heading in to expiration | Forex Factory

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How FX options can affect spot price heading in to expiration

  • #1
  • First Post: Oct 10, 2013 4:34pm Oct 10, 2013 4:34pm
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 http://goo.gl/V3tMdC from Forex dealers, and how price reacted:
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  • #2
  • Oct 10, 2013 4:53pm Oct 10, 2013 4:53pm
Oct 4th: http://goo.gl/ObnKzD
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  • #3
  • Oct 10, 2013 5:03pm Oct 10, 2013 5:03pm
Being informed where and why trading is happening is one of the advantages of knowing Forex market structure. Pair this information with known buyers/sellers, support/resistance... or trade price back to strike if data release in another currency throws it out of wack.
Example; Gbp news moves G/U up which may move E/U up to short back down/past a strike level in the first post.
  • #4
  • Oct 11, 2013 5:02am Oct 11, 2013 5:02am
In both your charts, price has broken the barrier before the cut. Doesn't that mean one-touch options have already been washed out of the market? I tend to sit up and pay attention only when price approaches a fresh level for the week going into the cut, as all contracts are theoretically still in play. I don't know what percentage of total options are one-touch though, maybe it's insignificant. Would be interesting to see a comparison of PA at the strike between fresh levels and previously reached levels.
si hoc legere scis nimium eruditionis habes
  • #5
  • Oct 11, 2013 7:15am Oct 11, 2013 7:15am
Heya numb! This is about plain vanilla options which are American-style, meaning they can be exercised any time (if they're in the money) up to the time of their expiration (NY 10am is the most popular) These aren't exotics or barrier options, thats a different thread but one I would like to discuss in the future as well. Just making this to discuss large normal options.

Now the first break of 1.35 could've been a combination of banks wanting to hedge their clients options before price took off under 1.35 (without hedging, the bank would have a lot of E/U it has to sell to clients @ 1.35 and price could be like 1.34 by 10am, who knows) and I'm sure since its a round # that there had to be some stops under it for barrier reasons as well. By far though, vanilla options at 1.35 in excess of $1 billion stole the show and dictated price on E/U that morning.
  • #6
  • Oct 14, 2013 8:59am Oct 14, 2013 8:59am
Very interesting - so do you just simply buy below, sell above all the way up to expiration?
  • #7
  • Oct 14, 2013 10:33pm Oct 14, 2013 10:33pm
There are many ways to trade a large option heading in to NY cut. You could spot signs of buying/selling to trade back to the strike if price gets pushed against market sentiment. Ie; poor news out of euro, sell the rallies above price back to strike. Sometimes these options hold price up during poor data only to have it fall afterwards once the option's gravity is gone after 10am.

To further understand whats going on, we divide the market to bulls vs bears. When only informed bulls need to buy under the strike and informed bears need to sell over it, there is a competition for liquidity. Here, 'informed' means that they know of the large option bc they are part of it, or they know who wants to push in to it, who needs to hedge against it.. most of all where they stand to profit from their compeition. The traders who are trading away from the strike are the uninformed. Their entry trigger is based on a higher high or lower low on some intraday timeframe (think about how retail/algo traders enter & exit trades). In other words, If they knew a billion dollar order & large traders were the ones happily consuming their liquidity and taking the other side of their trade, they wouldn't be trading!
  • #8
  • Oct 15, 2013 3:56am Oct 15, 2013 3:56am
Thanks!
  • #9
  • Edited 11:44am Oct 15, 2013 11:30am | Edited 11:44am
Presumably you're referring to OTC options as exchange traded currency options would normally be for a futures contract and not the spot/cash currency. With this in mind, how would you determine which strike prices are important based on only having your broker to tell you open interest / volume?
  • #10
  • Oct 15, 2013 12:23pm Oct 15, 2013 12:23pm
Quoting TranceTrader
Presumably you're referring to OTC options as exchange traded currency options would normally be for a futures contract and not the spot/cash currency. With this in mind, how would you determine which strike prices are important based on only having your broker to tell you open interest / volume?
Info about the large options expiries could be found anywhere. Sometimes even the volumes are published. You can't rely 100% on this info, but I follow it for years. I think it is pretty correct. If you see expiry of option with notional of 500 mio and more, you can expect that it's strike will act as a magnet. Most of the flows are connected with delta hedging or netting. As I worked as risk manager almost every time I netted the postion usually just before the time of expiry. I don't think that you can trade before the expiry because the range is usually 20-30 pips. What you can do is to buy a strangle with daily plain vanilla options 1-2 hours before the NY cut. Their volaility will be lower and the time decay would have done most of its job. Binaries aare also a good option.
  • #11
  • Oct 15, 2013 8:49pm Oct 15, 2013 8:49pm
Quoting srmfx
{quote} Info about the large options expiries could be found anywhere. Sometimes even the volumes are published. You can't rely 100% on this info, but I follow it for years. I think it is pretty correct. If you see expiry of option with notional of 500 mio and more, you can expect that it's strike will act as a magnet. Most of the flows are connected with delta hedging or netting. As I worked as risk manager almost every time I netted the postion usually just before the time of expiry. I don't think that you can trade before the expiry because the...
Where do you get your option info, I had access to a great feed when I worked non retail but now struggle to find a good feed since there is no central exchange.
  • #12
  • Oct 15, 2013 10:11pm Oct 15, 2013 10:11pm
Quoting Sonofsin5
{quote} Where do you get your option info, I had access to a great feed when I worked non retail but now struggle to find a good feed since there is no central exchange.
I've been using Darkstar's order flow info from http://www.orderflowtrading.com/News.aspx which is great bc its free. Theres a pay version that has more info, without delay though.

Just saw from that link that there's a large option on Aud/Usd above price, so we know that there is incentive from option writers to keep price under it and a reason to hedge if its going to break higher..
  • #13
  • Oct 15, 2013 11:50pm Oct 15, 2013 11:50pm
Quoting Sonofsin5
{quote} Where do you get your option info, I had access to a great feed when I worked non retail but now struggle to find a good feed since there is no central exchange.
I get this info form my brokers news. Here you can get it free http://www.forexlive.com/blog/2013/1...am-ny-cut-111/. The size of the AUDUSD option is 500 mio.
  • #14
  • Oct 16, 2013 12:11am Oct 16, 2013 12:11am
Quoting EmeraldEyes
{quote} I've been using Darkstar's order flow info from http://www.orderflowtrading.com/News.aspx just saw from that link that there's a large option on Aud/Usd above price, so we know that there is incentive from option writers to keep price under it and a reason to hedge if its going to break higher..
I'd be surprised if it broke through today, given a US debt deal is in the works. Vertical line is 10am new york
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  • #15
  • Edited 2:20am Oct 16, 2013 2:01am | Edited 2:20am
Saw that dealers are reporting an exotic option w/ related barrier orders on Aud/Usd @ .9550. This level hasn't been hit since mid-June and there's been a general negative sentiment since (RBA rate cuts & talks). There will be a side that wants to leave .9550 untouched (red offers under .9550) to win. They're going to spend some $$ in sell orders, if need to, to keep price under the barrier. If they fail and price exceeds the barrier, their buy stops (green box) are set above .9550 to exit them out of the unsuccessful defense.
With exotics though, there is not a set time that this option is to expire worthless. Interesting scenario. Hope to see how A/U will react. Current price @ .9530!
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  • #16
  • Oct 16, 2013 3:41am Oct 16, 2013 3:41am
Quoting EmeraldEyes
Saw that dealers are reporting an exotic option w/ related barrier orders on Aud/Usd @ .9550. This level hasn't been hit since mid-June and there's been a general negative sentiment since (RBA rate cuts & talks). There will be a side that wants to leave .9550 untouched (red offers under .9550) to win. They're going to spend some $$ in sell orders, if need to, to keep price under the barrier. If they fail and price exceeds the barrier, their buy stops (green box) are set above .9550 to exit them out of the unsuccessful defense. With exotics though,...
The problem with the bariers is that we don't know if it is American or European. If it is European only at the expiry matters if the spot is above or below the strike.
  • #17
  • Oct 16, 2013 4:34am Oct 16, 2013 4:34am
Quoting srmfx
{quote} The problem with the bariers is that we don't know if it is American or European. If it is European only at the expiry matters if the spot is above or below the strike.
Is there a time that barrier options expire? I was thinking that they're all OTC and expirys vary randomly.
  • #18
  • Oct 16, 2013 4:42am Oct 16, 2013 4:42am
Quoting EmeraldEyes
{quote} Is there a time that barrier options expire? I was thinking that they're all OTC and expirys vary randomly.
Time of expiriation is agreed between the buyer and seller. Usually it is on one of the major fixings:
Tokyo fix – 0:55 GMT
Tokyo cut – 7:00 AM London time
ECB fix – 1:15 PM London time
New York cut – 10:00 AM New York time, which is 3:00 PM London time
London fix – 4:00 PM London time
NY cut is the most popular.
  • #19
  • Oct 16, 2013 5:04am Oct 16, 2013 5:04am
I think there may be some merit to this form of analysis but personally I can't see how the average retail broker who provides the options information could genuinely cope with the exercising of a 500mio position and have the account in the first place, presumably the account would require a 10% minimum margin which is 50 million and a big number for retail trading. These numbers would be more realistically found in prime brokerage accounts and I'd be surprised if these brokers advertised their exposure.

I'm not saying what you suggesting isn't true, it most probably is true but I'm questioning the integrity of the retail brokers or new sources you're using.
  • #20
  • Oct 16, 2013 5:29am Oct 16, 2013 5:29am
Quoting TranceTrader
I think there may be some merit to this form of analysis but personally I can't see how the average retail broker who provides the options information could genuinely cope with the exercising of a 500mio position and have the account in the first place, presumably the account would require a 10% minimum margin which is 50 million and a big number for retail trading. These numbers would be more realistically found in prime brokerage accounts and I'd be surprised if these brokers advertised their exposure. I'm not saying what you suggesting isn't...
Retail brokers don't trade options for 500 mio. This info is provided to agnecies like Reuters, Bloomberg, MNI by bank dealers. Counterparties for options with larger notionals could be hedge funds or big companies. I traded plain vanilla and barrier options when I worked as risk manager for a company that was exporting a commodity. Volumes were not that large, but the information is available only for the banks and their customers.
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