(Repeat with no changes )
July 2 (Reuters) - While it's not an exact science, impending FX option strikes can often have an effect on the FX spot market as their expiries draw closer, especially larger ones. There are several billion euros of EUR/USD strikes between 1.1750-1.1800 for Wednesday's expiry, while Thursday's expiry has a mega 8 billion euros of strikes at 1.1800 and 5 billion euros of strikes between 1.1750-75.
Many types of traders and investors influence the FX markets, and perhaps the most important when it comes to options are the many institutions that supply and manage liquidity. They may have hundreds of trades on their books at any one time, which require constant hedging to minimise exposure to the related currency pairs - often with cash.
Those using FX options to trade FX volatility will also be heavily involved in the cash market, constantly adjusting positions to offset currency risk and thereby monetising the FX volatility.
As the option expiry approaches - 10 a.m. New York (1400 GMT)for G10 currency pairs - these hedging flows will typically increase as that 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/sell more of the underlying currency to meet their obligation.
If the option strike is near the current FX spot price, these hedging flows can often drive the FX spot market towards the strikes and help to contain price action until they expire, so it is worth knowing where they reside in advance. The magnetic effect from this option hedging is likely to contain EUR/USD in to the long U.S. holiday weekend, providing no external catalyst such as Thursday's non-farm payrolls data shock the market.
Related comments - the dilemma facing FX option traders
Options flag true extent of July 3 NFP data risk to USD/FX
EUR/USD 1.2000 is a significant FX option barrier
Fed's July meeting lights up the FX options radar
EUR/USD FX option strikes due to expire July 2-3-4
(Richard Pace is a Reuters market analyst. The views expressed
are his own)
