Billions of euros in FX option strikes around the low 1.14s have helped cap and underpin EUR/USD in recent weeks — a reminder that, while not an exact science, large impending option expiries can influence the spot market as they approach. EUR/USD has edged up a touch since Tuesday's softer-than-expected U.S. CPI data, but it remains well entrenched within a long-standing 1.1400-1.1500 range, with plenty more option strike expiries within those parameters likely to keep shaping price action into next week.
Traders using FX options to trade volatility are also heavily involved in the cash market, and as an option expiry approaches — 10 a.m. New York (1400 GMT) for G10 currency pairs — hedging flows will typically increase as the cash-versus-option relationship becomes more crucial to profit and loss. If an option is likely to be exercised, the opposing party may need to buy or sell more of the underlying currency to meet their obligation. These flows can often drive spot towards the nearest and largest strikes, adding to any nearby support or resistance and helping to contain price action until those strikes expire. There are many large strikes between 1.1400 and 1.1500 that expire on Friday July 17. Monday, July 20, sees the largest expiries at 1.1385-1.1400 (3.2 billion euros), 1.1425 (1.4 billion), 1.1440-50 (1.2 billion), 1.1475-90 (3 billion) and 1.1500-10 (1.7 billion).
Tuesday, July 21 brings 1.1400 expiries worth 2.3 billion euros, alongside 1.1445-50 (1.6 billion), 1.1470-85 (4.3 billion) and 1.1500 (2 billion). Wednesday, July 22 has 1.1400 expiries on 3.3 billion euros and 1.1490-1.1500 on 1.2 billion, while Thursday, July 23 sees 1.1400-10 (1.1 billion), 1.1450-65 (3.2 billion) and 1.1500-10 (2 billion). The lack of spot volatility within a familiar range is also weighing on FX option premiums - with EUR/USD implied volatility languishing close to multi-year lows.
Related comment - FX clues from the options market
EUR/USD OTC FX option strikes expiring July 17-2
(Richard Pace is a Reuters market analyst. The views expressed
are his own)
