forex option expiries – Forex Academy

FX Options Market Combined Volume Expiries. A weekly retrospective review for the financial week ending: 12, 06, 2020

Hello everybody, and thank you for joining us for the daily FX Options Market Combined Volume Expiries review for the trading week ending on Friday, 12th June 2020. Each week we will bring you a video taking a look back at the previous week’s FX option expiries and how they may have attributed to price action leading up to the maturities which happen at 10 AM Eastern Time, USA.

If it is your first time with us, the FX currency options market runs in tandem with the spot FX market, but where traders typically place Call and Put trades on the future value of a currency exchange rate and these futures contracts typically run from 1 day to weeks, or even months.

Each morning, from the FA website, our analyst, Kevin O’Sullivan, will bring you details of the notable FX Options Market Combined Volume Expiries, where they have an accumulative value of a minimum of $100M + and where quite often these institutional size expiries can act as a magnet for price action in the Spot FX arena leading up to the New York 10 AM cut, as the big institutional players hedge their positions accordingly.

Kevin also plots the expiration levels on to the relevant charts at the various expiry exchange rates and colour codes them in red, which would have a high degree of being reached, or orange which is still possible and where these are said to be in-play. He also labels other maturities in blue and where he deems it unlikely price action will be reached by 10 AM New York, and thus they should be considered ‘out of play.’ Kevin also adds some technical analysis to try and establish the likelihood of the option maturities being reached that day. These are known as strikes.
Please bear in mind that Kevin will not have factored in upcoming economic data releases, or policymaker speeches and that technical analysis may change in the hours leading up to the cut.
So let’s look at a few of last weeks option maturities to see if they affected price action.
Firstly, there were no notable options for Monday, 8th June.

So here is the early morning analysis for Tuesday as provided by Kevin on the USDJPY pair where there was an option maturing at 107.85 in 390M US Dollars.
I’ll quote you the text as provided by Kevin: USDJPY has found support at the level of the option maturity. However, the bear move was strong. Expect more downward pressure. The option expiry remains in-play.

Now, let’s roll on a few hours and to the candle, which closed at the 10 AM cut. The exchange rate at this time was 107.71. Just 14 pips below the strike. So we saw that the support held out, but the bears finally got their way and pushed through the support area. Prior to this, the 107.85 maturity had been acting as a magnet for price action.

Here is the analysis for the Euro USD pair, also on Tuesday, with a large maturity at 1.1300 for €802 M. Kevin mentioned that price action was in a sideways action and that at the time of writing it was fading and retesting the downside, but that it was oversold on the one hour chart and that there were important data out in the Eurozone area.

Now let’s fast forward a few hours. We can see an arrow above the candle, which took us up to 10 AM in New York cut. Subsequent to this price action pushed to a low of 1.1240, which was suggested by Kevin before rebounding. Price action was around the 1.1300 maturity one hour before the cut. However, momentum simply carried the pair up to the high of 1.1362. Traders who purchased a premium option for a Put would have been in the money as the price was above the maturity at the time of the cut.

On Wednesday we had two expiries on the Euro Usd pair, and Kevin’s analysis was based on the sideways price action of the pair on the one hour chart and also the fact that it needed to break above the resistance line and form a candle above it for a continuation up to the 1.1390 cut to be possible.

A few hours later, and this was the picture. Price did form a candle above the resistance line and moved to within two pips of the maturity, before falling lower.

Here, we can see that the price action at the maturity was 1.1366, just 24 pips away.

Let’s move forward to Thursday. Here we have the EURGBP pair, which was trading at 0.8959 at the time of the analysis where Kevin reposted the bull run was strong.

The pair continued to rally during the European session and hit 0.8990at the 10 AM Cut, just five pips away from the maturity.

On Friday the 12th, We had three option expiries for the EURO Usd pair.

The exchange rate at 10 AM New York was 1.1302, just eight pips below the 1.1310 option
expiration Kevin labeled in Red.

in fact price action remained elevated until the cut at which time the pair softened to a low of 1.1332

Lets now take a look at USD Japanese Yen; We have an option expiration at 107.35
Kevin suggested a dip in price action before a retracement to the maturity in his analysis.

There was indeed a slight pullback and then a continuation higher.

and here, we can see the exchange rate at maturity was 107.35, which was an official strike.

Please remember, Kevin’s technical analysis is based on exchange rates, which may be several hours earlier in the day and may not reflect price action at the time of the maturities.
We suggest you get into the habit of visiting the FA website each morning just after 8 AM BST and take the levels and plot them onto your own trading charts and incorporate the information into your own trading methodology in order to use the information to your advantage.
Remember, the higher the amount, the larger the gravitational pull towards the exchange rate maturity at 10:00 AM Eastern time.
For a detailed explanation of FX options and how they affect price action in the spot forex market, please follow the link to our educational video.

How do forex option expiries affect price action in the spot FX market

In this video presentation, we are going to be looking at how Forex option expiries affect price action in the spot FX market.
We will be exploring how forex options work, although we will not be concentrating too much on the technicalities of how they are traded because we are more interested in how FX options expiries can be of great benefit to traders in the spot FX arena.

So what are FX Options, and what is the significance of their expiries?

FX options is essentially another way of trading forex. In effect, they are different branches of the same entity. One is traded on the spot FX, thus known as the Spot FX market, which most of you will be familiar with, and the one we are discussing today is the Future’s FX Options market, where trades are made based upon the price of a currency exchange rate at some point in the future.

So what are FX options?

Options traders purchase what is called a premium, which is a contract and which gives them the right, but not an obligation to buy or sell an FX currency exchange rate at a specified price. This exchange rate is called a strike.
Typically these contracts will be purchased for a future date, typically days, weeks, or even months in advance and where the contract is purchased from a market maker, which is usually an institution that offers futures contracts trading, unlike banks and brokers which offer spreads in spot forex. Contracts expire on the date that the trader chose and always at 10:00 a.m. in New York, USA. This is known as the New York Cut.

If a trader wishes to purchase a premium, for a future date, for an FX Option, where he or she believes that a chosen currency pair’s exchange rate will be above that at the time of the purchase, he or she buys a Call Option. This is an option to buy. Alternatively, if the trader wishes to purchase a premium for an option where he or she believes that the future currency pair’s exchange rate would be below that at the time of the purchase, he or she buys a put option. This is an option to sell.

So how much does the premium contract cost a trader?

This will vary depending on the size of the contract and also so how far the future currency exchange rate is from the current one and the length of the future expiry date. However, futures traders often prefer this type of exposure in the FX market because they take a long term view of where exchange rates will be. And rather than swing trade to these levels in the spot FX market, they prefer to pay the price or premium for the contract upfront, and this then becomes their risk and exposure, unlike spot FX traders whose level of risk fluctuates with price action.

How do options traders make money?

If on the day of the maturity of the FX options contract at 10 a.m. for the New york cut the strike rate, or currency exchange rate, Is it at or above the exchange rate for a call option, or at or below the exchange rate for a put option, then the trader is known as being in the money. If a currency exchange rate is not hit, they are out of the money. If they are out of the money, the option expires, and the contract is worthless to the buyer, and he loses the premium.

If, however they are in the money, the buyer will get to exercise the option and create a position in the market. And the seller of the contract will be the counterparty in the ongoing trade. The seller of the contract also gets to keep the premium.

So who trades FX currency options?

Anybody can trade FX options, but typically we will find institutions, high net worth individuals, forex traders looking to hedge positions, forward forex traders, speculators, exporters, banks, institutions, companies with exposure in the foreign exchange market generally.
Insert G: So, how does FX currency options affect the spot FX market? Interestingly, when FX options expiries accumulate into large amounts, typically $100 million +, we often find that these accumulated amounts at a set currency exchange rate have somewhat of a magnetic effect to spot FX Trader in the run up to the 10 a.m. new york cut.

Although these huge amounts of options expiring at a particular level occur on an almost daily basis, it does not definitely mean that price action pertaining to a particular pair will hit the strike rate. However, some of the traders who are involved in FX options will also use the Spot FX market to hedge some of their own positions, thus using the Spot market to try and move price to where they need it to be.

Also, these currency options expiry levels with the accumulated amounts are available via certain brokers and commentators before the expiries. Thus this publicly available information is used by Spot FX traders to keep an eye out in the market in the period leading up to the expiry. Remember, the larger the amount of the expiring contracts, the more it would seem that there is a gravitational pull towards these exchange rates.

Forex.Academy will be making these levels available to you, free of charge, and they can be accessed on the options drop-down menu of our home page. For your convenience, as and when option expiries become available almost each day, we will also plot them onto a chart, as per this slide, and you will be able to view them there for your convenience.