One observation noted over the years is the powerful magnetic attraction of market prices to large expiries of so-called vanilla (plain ordinary puts and calls) options.
All things being equal (are they ever?) prices tend to gravitate toward the strike price at the time of expiry.
Why?
Because each side of the trade has to actively hedge their exposure.
Let’s use the example of a $500 mln JPY put/USD call struck at 100.00.
One side has an exposure of $500 mln dollars when the market is at or above 100.00 and the other side has no exposure. At 99.99, the other side of the trade has a $500 mln exposure and the other side has zero. All the jockeying back and forth tends to draw prices close to the strike as each side tries to position themselves for the moment when the option is exercised or expires out of the money.
This action is most noticeable in the run-up to 10 am New York time when the vast majority of options expire.
