The hedging of foreign exchange option expiries can influence price action in the spot market, especially when they are large, so dealers shouldn't ignore the potential effect from massive 20-billion-euro EUR/USD option expiries in close proximity to the current FX spot rate this week.
Option dealers are typically concerned with FX volatility over direction, so will minimise risk from the option strike by offsetting it with cash.
Known as delta hedging - this constant hedging can help to keep the FX rate close to the option strikes as maturity dates approach.
Those 20-billion-euro expiries are between 1.1180-1.1300, so there are plenty of related hedging flows to help contain the pair near current levels.
Volatility is likely to be further suppressed by the impending U.S. independence day holiday on Friday.
FX implied volatility gauges future actual volatility, and it's edging lower in shorter-dated EUR/USD options, reinforcing expectations of near term range trading and lower actual volatility in the FX spot rate - at least for now.
EUR/USD option expiries Click here