Thursday February 4, 2021 - 14:52:24 GMT
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How Currency Options Can Have an Impact on SpotFX
While many new forex traders think of options as binaries, traditional currency options are the ones that have an influence on the spot fx market. This has been the case this week where a EURSD barrier at 1.20 came under attack and it took three tries before it finally gave way.
The question traders should be asking is how to take advantage of, in this case, a classic defense of an options barrier strike price. I have compiled some posts on the Global-View Forex Forum and the Amazing Trader (AT) Private forum to give some insights on options defense and how to use the knowledge to your advantage.
Posted on the AT Forum’
Options defense GVI Forex Jay Meisler 20:51 GMT 02/03/2021 - My Profile The seller (writer) of the option will look to defend a strike level from trading, especially if it is a no touch but others as well. Take the current run at EURUSD 1.20, so far successfully defended. The way the seller will defend is to buy EURUSD above 1.20 to try and prevent it trading. If successful and EURUSD bounces it will sell out what it bought so it can reload buying EURUSD to defend 1.20. It will keep repeating buy/sell until either it wins the battle or 1.20 is taken out.
Posted on the Forex Forum
london red 13:46 GMT July 17, 2015
The price action over this period was a textbook case of how currency options can affect the spot market. Option barrier defense: Defender buys EURUSD to protect 1.0850 => sells out EURUSD on bounce, which limits retracement => repeats the process as expiration nears but bounce gets shallower => strike price attracts as expiration nears => barrier gets triggered, 1.0850 no longer supports and gives way for lower levels.
Posted on the AT Forum (Feb 3, 2021)
Options defense I imagine it would take billions (or at least lots of millions) to either protect or attack a major level like 1.20. I think this is where having access to a professional trading platform would have a big advantage as compared to the platforms that retail traders use. On professional forex trading platforms, you can see actual bid/ask prices and amounts in real time as orders appear at either the broker or ECN...very similar to Level II quotes on stock trading platforms. Retail platforms display the price that your own broker will give you, and that's pretty much it...you don't see the actual orders that pass between interbank "traders". On the other hand, do you really need all that data to understand the strike levels? I suspect not...especially after Jay's cogent explanation, it's enough for me to understand that a major price level like 1.20 is probably being defended and that's that. Weak side, strong side, whatever...all I really care about is that 1.20 is a critical level and price is bouncing off it. Price keeps on bouncing off it until it either goes through or the market stops trying, and that's that. You depend on your own memory and your own money management to make a profit.
Options defense If you are using the AT ladder system, then trading a defense scenario is pretty straightforward. In the case of EUR/USD right now, price is going down and there is obvious selling, you can call that the strong side. So...you follow the example and keep on selling until a blue horizontal line is crossed...which bar you choose is up to you. Enter a sell, wait a while, take profit when you feel like it, wait for price to rise again...enter another sell...lather, rinse and repeat. Use a nearby blue bar to serve as your stop. If the defense fails and 1.20 is breached, then that's OK...you were selling anyway. If the defense holds and price bounces back up, then that's what those blue horizontal lines are for...to serve as stops. Be mindful of a bounce if 1.20 holds...then you should start seeing a bunch of red horizontal lines (Jay's directional indicator) as market direction changes and a new episode starts. Then instead of selling, you should start buying instead, because that will be the new strong side.
See the following for an illustration of a textbook options defense of EURUSD 1.20
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