Do option expiries really have an effect on prices? It's all in the numbers
I thought I'd take another look at the options situation as there's a lot of emphasis placed on expiries and their effect on the market price.
In November 2013 I experimented with trading a big USDCAD expiry. The results were less than encouraging
The issue with options is that there are many variables. One of the biggest things I think people forget is that when we print that there is a big lump expiring at a particular strike, it's assumed that it is just one trade. It's also assumed that there will be a big battle in the price so that the one party or another are on the right side of their respective trades at expiry. There are a lot of misconceptions with option expiries.
Firstly, the amount it would usually take to move a market, say 50 or 100 pips, towards a strike price would be huge and probably far more than what would be gained from the option trade itself. For such a move to happen the conditions would have to be perfect both liquidity wise and from a RR basis for the option trader
Secondly, the trades reported are a accumulation of many trades. Take today's 1.1000 EURUSD expiry for 1.15bn. Here's the breakdown as reported by Bloomberg;
- 89.69m is made up of trades less than 20m is size
- 364.53m in trades 20m-100m
- 700m in trades over 100m
- All these options are EUR puts bar 2.42m which are calls
Obviously those trades may be able to be broken down individually but there won't be any information as to who has traded them. It may be possible to learn that someone, say JPM or DB, are holding 500m in trades of 100m+ but those trades might belong to 100 customers. Will 100 customers, plus all the others really have the same idea to move the market just to make sure their trades come in? I very much doubt it
EURUSD expiries: If a picture is worth a thousand words we still couldn't trade the expiries properly (puts are green, blues are calls, yellow is mixed)
There's no denying that there are big option players and plenty with the capacity to move the spot market just so they come out on the right side of the trade. China was a big player in options with regularly touted DNT's (double no touch) and barrier positions in EURUSD. These positions were worth knowing as they would add to the support and resistance picture at certain levels, and being the biggest central bank on the planet they had some clout to protect those positions with. They may still be big players but we just don't hear the market chatter now with the reduction of such talk due to the FX manipulation saga. It's also important to remember though that there are many option players who are just hedging exposure and are not really interested on how the option expires, as what they may make or lose on the option will be made or lost on the other side.
My view is that expiries may be just an explanation why a market may move at certain times and they are not really tradable. Only when conditions are perfect might we be able to try a trade.
For all my warnings on why expiries may not be tradable, today's expiry might be one of those days that are. Liquidity is light, we're 20 pips away from a big expiry, major markets in London and US markets are shut and perhaps more importantly, the expiry is very one sided i.e all puts. That potentially puts the balance of power with the option writers (sellers) rather than the holders (buyers) to see the price expire in their favour. In this case it's in the writers interest to see EURUSD above 1.10 at expiry. They risk finding themselves long EURUSD at 1.10 while the market is trading at 1.0980 (and that could obviously get worse and the price may trade lower as they are hitting the bids to square up). The holders are just risking their premium
So today will be a good test of the options/price reaction theory. Just remember that as with everything in trading, there's usually more to it than just what we see on the surface and there are no shortcuts to making money