Understanding Option Expiry Orders in Trading
In this article, we’ll delve into the concept of option expiry orders and how they can be utilized in your trading strategy. It’s not an exact science, but understanding these orders can offer valuable insights and potential advantages.
What Are Option Expiry Orders?
Option expiry orders relate to options or positions held by future traders. The expiry is the time when these positions must either be cashed in, realized for delivery, or left to expire. It’s crucial to note that predicting the exact behavior of traders at expiry is challenging since we don’t know if these positions are buying or selling the asset. The full details of these positions are not publicly available, leaving us to only know that there is an order at a certain price and that some market activity might occur as the expiry approaches.
The Magnetic Effect of Large Option Expiries
As a general rule, any orders over six hundred million tend to act like a magnet for the price. This phenomenon can be especially useful if you’re holding a trade and the price is nearing a significant option expiry level. Large expiries can stabilize the price, preventing significant movements until the expiry has passed. Traders can use this information to manage their trades more effectively, planning around these large order levels.
For instance, if you have a bullish bias on a currency pair like the Aussie yen and there is a major option expiry level of four billion at the 66 level, you can expect the price to be drawn towards this level. If the expiry is substantial, the price might not move far from this level until after the expiry.
How to Use Option Expiry Levels
Option expiry levels should not be the sole basis for making trading decisions. They should be used as an additional analysis tool. Recognizing large option orders at specific levels can provide valuable context but should not override sentiment or fundamental analysis. For example, if sentiment and fundamentals indicate you should take or close a trade, the presence of a large option expiry should not deter you from following through.
Practical Application in Forex Trading
Each day, major FX expiry options for the New York cut are provided, often with significant levels above one billion. For example, if the euro/US dollar pair has a 1.4 billion option expiry level at 1.1205, traders should monitor the price action around this level.
Option expiry times, typically around 3:00 PM GMT, can influence price movements. Often, prices might be held near the expiry level, and significant movements can occur post-expiry. Thus, these levels can serve as potential profit targets or areas of interest.
Conclusion
Option expiry levels act as magnetic zones, drawing or repelling prices. Recognizing these levels and understanding their potential impact can enhance your trading strategy. However, they should complement, not replace, your core trading analysis based on sentiment and fundamentals.