Defending an Options Strike Can Impact the Spot FX Market
While many new forex traders think of options as binaries, traditional currency options are the ones that have an influence on the spot fx market. Currently, EURUSD 1.08 a potential options strike level, has come under attack but so far the price action suggests a hidden hand may be defending it.
The question traders should be asking is how to take advantage of, in this case, a classic defense of an options barrier strike price. I have compiled some posts the Global-View Forex Forum to give some insights on options defense and how to use the knowledge to your advantage.
Rather than recreate the wheel, the following are posts from our Forex Forum archive that explain how options impact the spot market. The only changes to these posts are that the levels have been changed to options strike or options levels to make it as relevant in today’s market as it was when originally posted.
How an options defense can affect the spot fx market
Posted by GVI Forex
The seller (writer) of the option will look to defend a strike level from trading, especially if it is a no touch but others as well.
The way the seller will defend is to buy EURUSD above a strike level to try and prevent it trading. If successful and EURUSD bounces it will sell out what it bought so it can reload buying EURUSD to defend that level. It will keep repeating buy/sell until either it wins the battle or the options level is taken out.
Posted by a Global-View Member (excellent explanation)
The price action over this period was a textbook case of how currency options can affect the spot market. Option barrier defense: Defender buys EURUSD to protect an options strike level => sells out EURUSD on bounce, which limits retracement => repeats the process as expiration nears but bounce gets shallower => strike price attracts as expiration nears => barrier gets triggered, options level no longer supports and gives way for lower levels.
Posted by a Global-View Member
I imagine it would take billions (or at least lots of millions) to either protect or attack a major level I think this is where having access to a professional trading platform would have a big advantage as compared to the platforms that retail traders use. On professional forex trading platforms, you can see actual bid/ask prices and amounts in real time as orders appear at either the broker or ECN…very similar to Level II quotes on stock trading platforms. Retail platforms display the price that your own broker will give you, and that’s pretty much it…you don’t see the actual orders that pass between interbank “traders”.
On the other hand, do you really need all that data to understand the strike levels? I suspect not…especially after Jay’s cogent explanation, it’s enough for me to understand that a major price level  is probably being defended and that’s that. Weak side, strong side, whatever…all I really care about is that there  is a critical level and price is bouncing off it. Price keeps on bouncing off it until it either goes through or the market stops trying, and that’s that. You depend on your own memory and your own money management to make a trade.
Posted by a Global-View Member
If you are using the Amazing Trader  ladder system, then trading a defense scenario is pretty straightforward. In the case of EUR/USD right now, price is going down and there is obvious selling, you can call that the strong side. So…you follow the example and keep on selling until a blue horizontal line is crossed…which bar you choose is up to you. Enter a sell, wait a while, take profit when you feel like it, wait for price to rise again…enter another sell…lather, rinse and repeat. Use a nearby blue bar to serve as your stop.
If the defense fails and the options level  is breached, then that’s OK…you were selling anyway. If the defense holds and price bounces back up, then that’s what those blue horizontal lines are for…to serve as stops.
Be mindful of a bounce if the options level holds…then you should start seeing a bunch of red horizontal lines (Jay’s directional indicator) as market direction changes and a new episode starts. Then instead of selling, you should start buying instead, because that will be the new strong side.
DDENDUM:
Bullseye… 1.08 triggered… 1.0796 low… textbook options defense that finally failed
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