Large Option Expiries Could Move EUR/USD, AUD/USD and USD/JPY on Thursday

- Large option expiries can move the market and many are expected on Thursday

- Expiry levels tend to draw the rate back up or down to the level

- if the market is too far away there is the possibility of the opposite occurring and 'gamma explosion'

Large option expiries scheduled for Thursday afternoon could impact on market direction on the day.

Data from Thomson Reuters shows potentially market moving expiries situated between 1.1500-50 on EUR/USD, 0.7465-75 on AUD/USD, and between 111.50-55 on USD/JPY.

The options are set to expire at 15.00 B.S.T on Thursday and will exert an increasingly pronouned effect on price the nearer the time gets to expiry.

"The only time that counts for these options expiries is at 14.00 GMT each day," says Mike Paterson, a former analyst at Lliveforex.

The impact can be pronounced, says Paterson:

"As a former market maker I worked very closely with my options desk and there are times, quite a few times when USD/CHF did not go through a certain level (because of expiry flows)."

Option expiries impact on market direction via a process known as 'pinning' in which option writers try to manipulate the market price to avoid costly losses.

Only larger expires, valued at over 600m, tend to cause a measurable impact, says Jarratt Davis, a renowned forex trader and hedge fund manager. The expiry levels tend to act as a kind of "magnate" to the price drawning it down or up to it.

"Very often an option expiration of a certain price will act almost like a magnet. For example, if you got an option expiration of a billion on EUR/USD at 1.10 the price will tend to gravitate around 1.10. It might come up maybe beyond 1.10 a little bit but most likely it will eventually come back down. In a way it will just hover around option expiration price until the time of the cut," says Davis.  

In the case of EUR/USD most of the expiries are scheduled to occur well below the current market level in the 1.1590s which could suggest some downwards pressure in the run up to expiry.

Gamma Explosion

Although the effect of the expiries is normally to 'pin' the exchange rate to the option expiry level traders should beware of blindly interpreting option expiries in this way, as  there is also a risk that a really big move could pivot traders in the opposite direction to the expiry level as they give up trying to manipulate the market and instead join the trend. This is known as a 'Gamma Explosion' and can ignite big waves of buying or selling.

Option Expiries of 600bn or over for Thursday August 9.

EUR/USD: 1.1500 (1.1BLN), 1.1510-30 (1.2BLN), 1.1550 (1BLN), 1.1600 (823M)
AUD/USD: 0.7350 (700M), 0.7420-30 (600M), 0.7465-75 (2BLN)
USD/JPY: 110.85-90 (716M), 111.00-05 (1.8BLN), 111.25-30 (1.1BLN) 111.50-55 (2BLN), 112.00 (1BLN), 112.20 (1.1BLN)

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