Comments on: AUD/USD: Looks heavy but likely to stay range-bound

By: Sean Lee

Sean Lee — Mon, 18 Feb 2013 03:47:39 +0000

Yes Mike, every option creates some spot exposure which the options dealer can decide to hedge or not. Normally they will partially hedge but when a big level breaks then they rush to hedge the rest + new clients emerge looking to buy more puts (in the event of a break lower) and this creates even more spot activity.

By: mike

mike — Mon, 18 Feb 2013 03:35:09 +0000

when clients are buying put, brokers are selling put, so to hedge their exposure, brokers will create short positions at spot.

Am I right, Sean? haha

By: Nooz

Nooz — Mon, 18 Feb 2013 03:29:22 +0000

Thanks again Sean, much appreciated. I hope you don’t mind if I come bothering you with similar questions in the future.

By: Sean Lee

Sean Lee — Mon, 18 Feb 2013 03:22:50 +0000

Big effect on the spot market just like a spate of big stop-loss orders going off which is in effect what is happening. The bigger the level, the more spot buying/selling the options market will have to do on a break.
Just read a couple of local bank’s research and neither of them think that there is a big chance of a downside break (which usually means it’s about to collapse 🙂 ).

By: Nooz

Nooz — Mon, 18 Feb 2013 03:17:39 +0000

Thanks for the answer Sean. I really appreciate it. You’ve cleared up my confusion. I’ve been trying to gather a better understanding of options and their relationship with spot.

Just a follow up if you have the time. Does the scurry to buy downside protection have an effect on the spot market or does this chaos stay limited to the option market?

By: Sean Lee

Sean Lee — Mon, 18 Feb 2013 02:41:07 +0000

Hi Nooz. Options traders will set their books up according to trends, volatility and ranges. Similarly large corporates will not hedge their downside exposure whilst a market is trading inside a specific range or whilst a trend seems to be forming. This is why 10150 will become very important imho especially for options market as if it breaks there will be a big scurry to buy downside protection.

By: Nooz

Nooz — Mon, 18 Feb 2013 02:28:10 +0000

Hey Sean, hope you had a good weekend. Sorry if this is a little long winded for a comment.

I have a question regarding FX options and how it effects spot. Information read throughout last week repeatedly suggested the same thing. That some participants are “Not prepared for the downside”(IFR) on a break below 1.0150. My current assumption is that this is referring to option activity. The reason I believe this is I’ve noticed over time that exotic barrier type options activity will cluster around historical highs/lows and the outside of long term ranges. The 1.0150 seems like a likely candidate for heavy options activity. Can you possibly give me an explanation of what it might mean for people to not be “prepared” for more than expected downside? What the effect would this have from an positional adjustment perspective? Could this have to do with speculators dumping longs while RM investors are choosing to keep collecting their carry?

Sorry if this is insufficient information to allow you to give a good answer. I gotta ask someone cause it’s bothering me lol.