NY cut options expiries: why price pins to a level

[Shadow Trader]

At 10am New York time each day, FX options expire. When a large strike sits near the spot price, there's an incentive for dealers who hedged those options to keep the market near that level into the expiry. The result is a magnet effect: price hovers, spikes slightly, and returns.

The amounts are big. Expiries of a billion euros or more at a round strike on EURUSD are published by some banks and data services in the morning notes. They don't always matter, but on days when a large strike sits within 20 or 30 pips of spot, price action in the hours before 10am can feel strangely constrained.

After the expiry, the constraint disappears. A move that was held back for hours can unwind in minutes.

For a scalper, that means two things. First, range trading before the cut can work better than usual when a big strike sits close. Second, the minutes after the cut can bring a burst of movement that has nothing to do with news.

The downside is that the information about expiries isn't free or always accurate. Rough knowledge is better than none, though.

Where does the information come from? Several banks include expiry notes in morning research, and some data services publish lists of strikes with sizes. The figures are approximate and not always right, but they highlight which levels have large amounts concentrated.

A few caveats are worth knowing. Expiries only matter if the spot is close enough to the strike for dealers to hedge actively. A big strike 80 pips away has little effect on the day. The pinning effect is also weaker when a major event, like a central bank decision, is due the same morning, since the news overwhelms the options flow.

And after the cut, there's often a burst of movement as the hedges unwind and the constraint disappears. For scalpers who like to sit out the first part of the day, the minutes after 10:00 New York can offer a cleaner move than the hours before.

Has anyone tracked the 10am NY reaction for a few weeks, and was the pin visible?

[Amanhasnoname]

I tracked it on EURUSD for about six weeks, using the expiry lists from a free daily note, and the pin was there often enough to take seriously. On the days with a large strike within twenty pips of spot, price spent most of the hour before 10:00 New York within a few pips of the strike in a clear majority of cases. On days without a nearby strike, I couldn't see any pattern at all.

The part I found most useful was the period right after the cut. On several of the pinned days, EURUSD moved ten or fifteen pips in the half hour after expiry, and it often went in the direction it had been pushing against all morning.

I don't trade the pin itself any more, because the ranges are small and the spread eats too much. What I do is mark the strike, stay flat until 10:00, and then look for a breakout of the morning range afterwards. It has given me some of my cleanest New York trades.