People trading EUR/USD should beware downside option barriers and related short gamma, which could spur volatility and exacerbate losses.
Option contracts with specific barriers and triggers that generate profit and losses when touched, will obviously have implications for those with exposure, but also even those without.
That's due to the booking of profits, covering losses, and general option portfolio hedging implications.
Typically, dealers should expect defensive bids ahead of key barrier levels and often lean against these, making them harder to break.
However, when they do break, the options market will often become short gamma - a lack of options in that zone, which can drive up their cost via implied volatility, and can also make the cash market more volatile and prone to further moves in the same direction of travel.
Option barriers in EUR/USD are expected around 1.1650 - levels last traded November 2020, with a break then threatening those at 1.1600 - last traded July 2020.
Price action in FX options does reflect a bearish lean, but pandemic-era low implied volatility makes options cheap and offers attractive reward versus risk should the barriers break and fuel deeper declines and increased volatility. nL1N2QU0I4
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