Options trading is starting to heat up
This week is the first real full week of trading in the New Year and option traders are starting to set their stalls out.
AUDUSD has been busy today as over 600m of 7900 Calls have traded with an expiry of 9th Feb. Ordinarily that might not be newsworthy but for the fact there’s already currently 1.75bn expiring at 0.7900, and 2.57bn at 0.7800 that day. A possible reason for the large option plays could be related to the RBA meeting that week too (6th Feb). That’s something to stick on a post-it note to remember nearer the time.
Now to the euro and tomorrow we have some large EURUSD expiries.
- 1.1895/1.1901 940m
- 1.1950 979m
- 1.1985 2.32bn
- 1.1995/1.2000 988m
- 1.2050 981m
Not only is the 1.1985 option notable for it’s size but we’re also hearing that there’s a large digital expiry in there too. The majority of the options we list are plain vanilla options, which mean they are in play until expiry, and only pay out if the spot price is above/below the option strike level (depending on whether they’re calls or puts) at expiry. The level of profit for the holder is determined by how far they are above/below spot. Digital options are similar in terms of how they expire but different in that the payout is set from the start, so it matters not whether they expires 1 pip or 1000 pips in the money. Unfortunately we don’t know whether the holder of this digital option is in calls or puts but because there’s two sides to options (buyer & writer) we can expect there to be a battle between the two to expire the option in each individual’s favour, if the amounts involved make it worthwhile for them to try and move the spot price favourably at expiry.
All this could be redundant if we see the euro move a fair way away from the current level, so we’ll have to see where we are tomorrow. What I have done to add a bit more colour is look at the break down of the big expiry at 1.1985;
- 1.95m are calls
- 376m are puts
- Of the calls, there are a total of 13 trades, 10 of which are over 100m in size, totalling 1.77bn
- Of the puts, there’s a total to 6 trades, of which 2 are over 100m in size, totalling 225m
From that we know that the call holders will want the price above 1.1985 at expiry so it’s going to come down to who has the greater ammo to get the price onside. The breakdown is potentially important because fewer traders holding larger options are more likely to try and push the market around than many traders holding small positions.
So, there’s a bit of colour for what’s happening in the options world right now, and if you want to know how options are important to trading, read An explanation of Forex options and their impact on currency markets.
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Great explanation.
Great post .Even though it’s not clear whether these options (regardless puts or calls) are directional, hedges or stops , it still gives a good idea about the levels which are important to the market. In the AUDUSD case my best bet it we see a 50/50 play between stops on this rally between opportunistic sellers and momentum buying. Especially a break through 0.79 ( for the 0.7900 buyers)will be viewed as significant. If one sells 1 cash for instance in the 0.7850-0.7900 and buys 2 through a 0.7900 call , in case of RBA making a move , it’d be a very nice stop and reverse as AUD would get a serious boost from the high yield . In case of no move and AUD finds a top and reverses, the premium paid for the protection should be made back quite easily.
The 0.7800 calls, being in the money now should provide some offers if AUDUSD would not be far from that zone going into the rate decision.
One and all tells me we could be in for some rangy markets in January (numbers of course not being disruptive) . The buyers of the options will certainly look to job to sell their long gamma, created by buying the 0.7800 calls, in current zone and buy back sub 0.7800 in order pay back for the premium they paid .
That’s great analysis on a way to use options, and probably exactly what’s happening in tye market now. New year, new central bank decisions to trade.