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Originally Posted by pqt
May I ask why the market always tends to go after options barriers and stops?
It maybe evident for old pros but for us noobs, a good answer may help understand this strange beast better  |
PQT,
The writers of exotics, for example knockouts and no touches, typically have deeper pockets than the buyers. This largely due to the fact that these are desks of major financial institutions. They have inherent interest in forcing, in this case euro lower, since they will stand to collect premium from what they wrote without having to payout. Can this level be defended? Nothing is guaranteed and if it gets close and not through you will get a nasty squeeze higher as they are forced to cover.
In regards to the stops, one of the easiest ways for a bank trader to make money is to run stops. If there are large stops within reach they will begin selling a good deal before to get short. Other prop traders will smell the action and join in the party. Once the stops start going the eur dealers could sell more than they need and force it lower, where they will grab more than they need and get long. The market will most likely snap back and they will have booked a nice profit and will be long from lower levels.
I am not sure how good I explained that....