BeForex

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The topic is an intraday strategy

Using option expiries

If you’re one of the lucky people whose forex broker offers the services of a major news provider as part of the regular account package, you can make use of the option expiry strategy in trading forex. In this method, the trader only depends on the actions of a particular segment of the market for making profits, and does not concern himself with technical or fundamentals analysis that much.

Option expiries are events that occur when large forex options bought and sold by many traders become worthless. A trader has two choices. Either he can sell his option contract in the market before the expiry date to somebody else, or he can exercise the option at the expiry date in return for a profit (this is a bit more complicated, but we simplify the matter and suppose that the option is a European one, for example.) Thus, it’s not hard to understand why the date and time of expiry is a time of volatility in the forex market. If the quote is close to an option’s expiry value, traders will risk some losses in the spot market while trying to steer the quote in the direction they desire in return for the usually much larger profits of the option contract. The purpose is to side with them at such times, and use the volatility for some profit as option traders cash in on their contracts.

In American trading, most option contracts settle between 8-10 am. Some also settle after that, reaching up to 11 am. Thus this strategy offers its greatest profit potential in this period. To give a practical example, suppose that there is a large option expiry at 1.445 at 10 am, and the quote is at 1.44 now, at 8:20 am. If there is a release that moves the quote away from 1.445, we can anticipate that traders will do all they can to bring the quote closer to the 1.45 value, and this, as the price falls to 1.438, for example, we’d buy joining the option traders in the expectation that the option support will hold.

It is important to understand that this strategy is not without its risks. There is no reason to think that the option traders will always succeed, for example. If they fail, their contracts will expire being worthless, and the trader who sided with them will also suffer some losses. The issue here, as it always is, is the issue of risk controls. You need to make sure that the risks you take are well compensated for by the rewards on offer. If not, there’s no point in taking the trade.

To learn forex, you need patience and determination. To succeed, you also need commitment, emotional control and those you can achieve through constant practice. Through your trading career you’ll discover many more strategies beyond those that we discuss here and elsewhere, and it’s good to keep in mind while applying them that any method can fail in the absence of proper risk management. There is no secret, risk-free path to success in forex.