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Aug 31 - 07:55 AM

EUR/USD - COMMENT-What Next For EUR/USD If Massive 1.20 Options Breached?

By Richard Pace  —  Aug 31 - 06:25 AM

EUR/USD 1.2000, which last traded May 2018, contains a huge amount of options related barriers and triggers that would typically exacerbate the reaction to a breach of a major psychological level - but this time the reaction might be contrained.

1.2000 contains a wealth of binary touch and digital options, which pay holders a predetermined amount if EUR/USD trades 1.20 before, or is above it, at expiry, as well as knock in/out triggers, which would bring simple vanilla EUR call options into play, or render them dead.

EUR call options allow holders to buy EUR/USD at predetermined lower levels and amounts.

However, dealers have had more time to prepare and hedge for a 1.20 breach since EUR/USD's initial rally through 1.1900 in late July, suggesting a break of 1.20 is now unlikely to prompt the same EUR/USD spot and option implied volatility hedging demand as it would have done.

Without a renewed catalyst, profit taking may well dominate above 1.2000 now, especially given the ever new record EUR/USD speculative long nL1N2FX03Q, and excessive USD weakness since late June.

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Refinitiv IFR Research/Market Commentary


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