EURUSD looks set to stay range bound as options players tighten up the 1.12-1.15 leash

Option players are playing the gamma game in EURUSD as vols tumble

If you think it looks like the life has been sucked out of EURUSD you’d be right. The lower volatility conditions are being aided by traders using whatever means they can to squeeze out the pips. To highlight that case, 1 month ATM (At The Money) option vols are at the lowest since 2014.

EURUSD 1m ATM option vols

What this selling of volatility has done is leave these volatility traders long of gamma. This basically means that as the price moves up or down, traders can become longer or shorter than their original positions, and so they can tend to cover those positions as the market dictates. There’s a bit more to it than that but I’ll aim to keep it simple here.

Reuters note that there’s around 90bn in options expiring between 1.12-1.15 between now and the Brexit date 29th March, and that is helping to keep the price contained. Because it’s such a tight range in real terms, it means traders are having to adjust for these gamma changes more often, and that has the effect of sucking even more volatility out the market as even small rallies are hit and dips are bought and sold, purely to offset these gamma positions. Of course, while big data moves and other headlines can bring bigger moves intraday, unless we see a break of the 1.12-1.15 range, these players just step back in to keep the price contained.

How can we trade it?

All the above enforces what we have seen clearly on the charts for some time. Myself and many of the folks in our trading room have been waiting for and playing the 1.12-1.15 range, as the edges present themselves. While the options info doesn’t guarantee the price stays within the range, it helps maintain the range while there’s no big news to force a change of it. So, this information helps strengthen the range play strategy. That’s for the wider range but in between, the intraday moves can be played against the levels that define themselves as we go. For example, 1.1365/70 is a defined top, the same way 1.1335/40 was last week, while 1.1320/30 marks support.

EURUSD 15m chart

We’re finding that these and older levels, that are pretty minor in the bigger picture, are holding with greater strength. For trading, what we need to do is note the wider range on the higher time frames (H4/Daily) and then come down to the H1-15m charts to find those intraday levels to scalp.

And that’s really the play here in these quieter times. There’s no point trying to get in a trade in the middle of this 1.12-1.15 range and thinking you’re going to get 300 pips out of it. What we’ve been trying to do is pick the intraday levels and trade them to the next level, taking partial profit when it’s there and locking the risk down to BE or better as quick as possible. In the same way these option players are trying to squeeze pips out of the vols, so must we do the same until something changes.

What we can also plan for is potential breaks of the wider ranges. Myself and the trading room guys were quick to plan and trade the Jan break of 1.15 but we were also well covered if it failed, which it did.

As traders we have to be ready to identify and change our trading styles to suit the market conditions and knowing what is creating those conditions gives us an edge as we then know what we need to plan for. In the case of EURUSD it’s pretty simple. We’re sitting on the 1.12-1.15 edges but planning for a possible break, and while in the range, scalping the levels that show up. We don’t expect more than the market has shown it can deliver, and we’re happy to take the small pips when they come. There’s no need to increase risk, just to try and catch a move, the best play is to keep risk and trade sizes smaller intraday and try and keep the account ticking over with smaller gains. We have to maintain the discipline of patience and letting the trades come to us and not getting frustrated and chasing trades we end up regretting. Don’t guess and be quick to acknowledge when we’re wrong.

Option news and strategies is something we often discuss in more detail in our trading room as they can help form and define our trading strategies. If you want to know more, you can sign up here.