FX Option Expiry Levels
Just had a question about how to use option expiry levels in FX. Now, if you just take a look at the feed, you will see that each day, the major FX expiry options for the New York cut are given.
So let’s take an example for today in the euro, US dollar pair. The kind of options you want to look at is when they’re above about one billion. That’s an option that tends to have more impact.
So here’s an example of one on the euro, US dollar pair, 1.1205 to 15, we have a 1.4 billion option expiry level. So you can see here, just around this level here. Now, there isn’t a precise science to trading with options but first of all, to be aware that what an option is is a financial instrument that gives the holder the right but not the obligation to buy or sell an underlying asset at a predetermined price within a given timeframe.
So what we have when we’ve got a option level here, before the New York cut, which is around three o’clock at GMT each day, this option is live until that time. And what you want to do, there isn’t a precise science, what you wanna look at is the kind of price action around this level. So you an see here that this level held very keenly and there was a defense of this option level and price wasn’t able to move very far away from it.
And then with the ECB meeting, there was a sharp rise and pull away from the option level.
So what you want to do is you don’t see whether it’s a put or a call option, you can’t see whether it was buying or selling, but you can see is the price action around it. So whenever you want to look at these levels, just take a look at the FX expiry options and then look for large levels which are near current prices.
So here on the euro, US dollar, you would have seen that prices sat right in a very strong option expiry level. And then you’re really looking for the price action around that move and don’t forget, the option expires at three o’clock GMT time. So sometimes you’ll see price being held in by an option, but then when the option expires, you can see price rally sharply away from it. So that’s one thing to look out for.
So consider them almost to be like magnetic zones. Sometimes they draw price towards them, other times they would draw price away from them. Can be very helpful if you’re looking for a profit target, and you see that there’s a large option expiry level, that can be a good profit target ’cause you know there’s likely to be a battle between buyers and sellers there.
But as I said, there isn’t a precise science to them but just recognizing where the key levels are can provide some good opportunities.