How does Option Expiration affect the Forex market?
Option expiration is one of those things that a lot people struggle with. It is because they see them coming through the feeds, they see that there’s an option expiration on certain currency pair at a certain price yet they do not know how to trade that. So how can you make pips from an option expiration?
The whole concept of option expiration is a complicated one. It is very difficult to predict whether an option expiration is going to push the market up or push the market down. Partly this is because you need to know various strike prices for certain options. Basically, only when you know whether the strike price is above or below the price you can expect whether or not traders are going to exercise those options and buy or sell that currency pair.
However, very often an option expiration of a certain price will act almost like a magnet. For example, if you got an option expiration of a billion on EUR/USD at 1.10 the price will tend to gravitate around 1.10. It might come up maybe beyond 1.10 a little bit but most likely it will eventually come back down. In a way it will just hover around option expiration price until the time of the cut.
Obviously, the whole answer to the question is complicated. It involves strike prices and calls and whether or not trades are going to be exercising those options. This kind of information, as I said, is very difficult to get hold of. But the simple way of trading this is understanding that really big expiry orders (I’m talking maybe over $600 million to a billion to $2 billion to $3 billion) tend to act like a magnet to the price. With this information on its own you can make some pips. It could help you to scout the pair range, trade that pair up or of that level.
To sum up, it is quite useful information but it is not really something to make a trading strategy out of.
That is how the option expiration affect the Forex market. Hopefully you can use that information, even if it is a tiny bit of an information, in order to make some pips.