sticky strikes

[mensatrader]

Hi guys

is it true that in currency options markets, where daily expirations tend to affect the behavior of the spot, that one always has to gain from selling a cheap overnight option or buying an expensive one?? why?

secondly, why when dynamic hedgers are long a strike (and consequently static hedgers short it), the strike will be sticky. It whip otherwise.??

many thanks

 

[mensatrader]

Hi guys

is it true that in currency options markets, where daily expirations tend to affect the behavior of the spot, that one always has to gain from selling a cheap overnight option or buying an expensive one?? why?

secondly, why when dynamic hedgers are long a strike (and consequently static hedgers short it), the strike will be sticky. It whip otherwise.??

many thanks

can someone please shed some light on it?? many thanks

 

[mensatrader]

Hi can someone please help explain, I read that from book and I really don't understand what it is talking about. Many thanks

 

[Shakone]

Hi guys

is it true that in currency options markets, where daily expirations tend to affect the behavior of the spot, that one always has to gain from selling a cheap overnight option or buying an expensive one?? why?

secondly, why when dynamic hedgers are long a strike (and consequently static hedgers short it), the strike will be sticky. It whip otherwise.??

many thanks

mensatrader, I don't find these questions very clear, and without reading the book and the section it's not easy to know what you're asking.

Lets take the second question first. What do you mean by 'long a strike'? Is this someone who has bought the option, or are you talking about a hedger who is trying to hedge the risk associated with selling an option? Dynamic hedging and static hedging are two separate ways of hedging, one needs to be adjusted during the lifetime of the option, the other doesn't.

Define the terms 'sticky' and 'whip' for me.

 

[Shakone]

Is the question, why is it that sometimes on expiry day, the price tends to stay (or stick) around the price relating to the strike of the most traded options?

 

[Martinghoul]

Not sure about the ccy options question. I don't see the rationale for selling the cheap one/buying the expensive one.

As to the "sticky strike", yes, there's an effect like this (btw, be careful using the "sticky strike" terminology in this context, as it's commonly used to refer to something else). If a mkt-maker ends up with a large strike risk, they tend to make sure that the expiry price ends up as close as possible to the strike in question, in order to minimize losses. They do this by delta-hedging increasingly aggressively. This is what Shakone mentions above, btw.

You need to keep in mind that these very broad rules are generalization. These things happen sometimes and other times, the exact opposite happens. Given that everyone knows about these dynamics now, it's much more likely that the heuristics don't actually work.

 

[mensatrader]

mensatrader, I don't find these questions very clear, and without reading the book and the section it's not easy to know what you're asking.

Lets take the second question first. What do you mean by 'long a strike'? Is this someone who has bought the option, or are you talking about a hedger who is trying to hedge the risk associated with selling an option? Dynamic hedging and static hedging are two separate ways of hedging, one needs to be adjusted during the lifetime of the option, the other doesn't.

Define the terms 'sticky' and 'whip' for me.

I don't understand either. I guess sticky means price will moves around close to strike?

thanks

 

[mensatrader]

Not sure about the ccy options question. I don't see the rationale for selling the cheap one/buying the expensive one.

As to the "sticky strike", yes, there's an effect like this (btw, be careful using the "sticky strike" terminology in this context, as it's commonly used to refer to something else). If a mkt-maker ends up with a large strike risk, they tend to make sure that the expiry price ends up as close as possible to the strike in question, in order to minimize losses. They do this by delta-hedging increasingly aggressively. This is what Shakone mentions above, btw.

You need to keep in mind that these very broad rules are generalization. These things happen sometimes and other times, the exact opposite happens. Given that everyone knows about these dynamics now, it's much more likely that the heuristics don't actually work.

That's good to know. Many thanks mate

 

[mensatrader]

As to the "sticky strike", yes, there's an effect like this (btw, be careful using the "sticky strike" terminology in this context, as it's commonly used to refer to something else). If a mkt-maker ends up with a large strike risk, they tend to make sure that the expiry price ends up as close as possible to the strike in question, in order to minimize losses. They do this by delta-hedging increasingly aggressively. This is what Shakone mentions above, btw.

Hi man, would you mind if you could please illustrate with an example or something? Many thanks mate

 

[Martinghoul]

Hi man, would you mind if you could please illustrate with an example or something? Many thanks mate

Here's a decent enough explanation:
http://www.theoptionsinsider.com/education/?p=6563

 

[Purple Brain]

Here's a decent enough explanation:
http://www.theoptionsinsider.com/education/?p=6563

Don't think I've come across anything like this before and I've read around the topic a little.

Fascinating. Cause and Effect, but with expectations and implications thereof factored into subsequent potential cause and possible effect ad nauseum thrown into the mix. I'd need to grow another head to have any hope of understanding how the pros play this.

Thanks for the link.

 

[Martinghoul]

Don't think I've come across anything like this before and I've read around the topic a little.

Fascinating. Cause and Effect, but with expectations and implications thereof factored into subsequent potential cause and possible effect ad nauseum thrown into the mix. I'd need to grow another head to have any hope of understanding how the pros play this.

Thanks for the link.

Well, that's exactly the point... The pros used to play these games back in the day when they were able to make money from less sophisticated mkt participants. With time, these mkt participants became increasingly savvy, which introduced all these game theoretic layers of complexity, which mean that the payoff, even for the pros, is extremely uncertain. So the pros have really stopped doing it (at least as a strategy). Nowadays you can still occasionally observe effects like this, but there's almost no way to take advantage of them in a repeatable way.

 

[rsh01]

Nowadays you can still occasionally observe effects like this, but there's almost no way to take advantage of them in a repeatable way.

a general comment.... not directed at martinghoul btw....

with re to fx some news feeds (eg IFR) provide upcoming large individual (say > £500mn) ccy option expiries for the day / week, & I have enjoyed watching the PA around this level/strike (level often corresponds with a s/r level) with intrigue as expiry draws nearer. it can hover/tread water here for a while (all v vague, sorry!). is this where they are delta hedging? or just protecting the barrier with heavy bids/offers?

... then soon after expiry time price moves sharply through that level/strike as they appear to pull all orders (hard to tell in fx).

imo, & as MG states, this doesnt happen enough to use as criteria for trade setup, but still worth noting if you are entering/exiting a trade. this, iirc from reading about institutional fx traders, is in part why round numbers (& halfs) can act as S or R levels....cos they attract greater option interest from the bigger players.

i am just starting to look at fx futures options, so will just touch base with mr crabs before i decide to switch all my funds from one ccy to another for free money.

happy to hear of different opinions.

 

[Purple Brain]

A really interesting post rsh01.

Could you suggest a link where I could get a heads up on upcoming expiries?

I have googled the topic, but all I've got is brokerages offering trading in them and those I've drilled down into don't seem to provide any calendar type data.

 

[rsh01]

i signed up with oanda on demo a while back which included news feeds inc IFR (reuters), DJ, UBS + other news releases. not sure if you can still get access to these through demo, if not just stick in a few quid for live acct.

there was a ran squawk delayed feed link going about but they have stopped that......but it copied most of its stuff off IFR anyway. i do look at order flow on IFR, quite handy addition to your tool set imo.

 

[Purple Brain]

I currently trade with OANDA. I have seen they have a news feed facility, but found the constant stream of chatter distracting. Thanks for the advice, will have a look and see if I can filter it for just what I'm looking for.

 

[Purple Brain]

i do look at order flow on IFR, quite handy addition to your tool set imo.

I probably shouldn't need to ask, but I'm used to feeling stupid, so what's IFR?

 

[rsh01]

yep you can filter the news on oanda, though filter function is not great so you shld check. & you cldnt filter for more than one ccy.

forex live has free calendar, IFR used to have/has bond auction times iirc.

i asked IFR a while back how they determined some of their key fx levels in reports & it was purely through looking at prev support s/r prices ie TA. some of their wording indicates they have tapped into their network of FO buddies, & gathered order books from fx desks but i just dont see how that info wld become available to retail unless its a spoof a la certain analysts recommendations at goldman sachs et al.

they do offer diff services at much higher costs so perhaps you get some snippets of their order book at higher membership prices.

gammajammer wld be able to answer in a jiffy, shame.

 

[rsh01]

i wish t2w cld get some high up institutional FO FX trader for a one off seminar, wld expect it wld have so much interest - i certainly have a plethora of q's...plus wld increase foot fall.

surely someone has connections?

(slapbooby doesn't count)

 

[rsh01]

I probably shouldn't need to ask, but I'm used to feeling stupid, so what's IFR?

apols... Int Finance Review...a reuters off shoot.

http://www.ifre.com/