All beginning order flow traders love exotic options. They are a great tool to add to anyone’s trading arsenal no matter what type of trading system you may have. But, there are some people who believe that exotic option barriers are a relatively new occurrence. I have found some very interesting forum posts from Moneytec where some traders were discussing option barriers back in 2003 and 2004.
Is it possible? Exotic option barriers existed back in 2004? It is possible.
First of all what is an option barrier? I have created a complete exotic option barrier section for the order flow mastery course, but I will provide a snippet in this article.
Lets say a hedge fund is bullish on the AUD/USD. If they want they can buy up a few billion worth of AUD/USD in the spot market. Or they can choose to structure an exotic option to express this bullish view. They choose to buy a 1.10 One Touch option with a payout of $30 million dollars and a two week expiration date. If the AUD/USD touches the barrier level of 1.10 even just once then the option payout of $30 million dollars will get triggered. The person who sold the hedge fund the option(typically the bank) will need to pay the hedge fund the money.
In order for the hedge fund to buy this exotic option, they need to pay a premium. The option premium is quoted as a percentage of the payout. So lets just say the bank quoted a 30% of payout cost. So the hedge fund needs to pay 30% of the $30 million option payout in order to buy this particular exotic option. So the hedge fund needs to pay $9 million to the bank upfront.
If before the option expiration in two weeks the market hits 1.1000, then the hedge fund gets the option payout. If the market does not touch 1.10 during the options life, then the option will expire worthless and the bank will pocket the hefty premium.
This is why there can be very huge option battles around these psychological and round numbers. There is one party that wants to knock out the barrier, while there is another market participant that wants to defend the barrier level.
It is not because of some magic support and resistance. The magical psychological and round numbers on your chart causing price to bounce off it. The real reason is because there are option battles conducted at these levels.
Now that you know what an exotic option is, let me link to you the moneytec forum posts that talked about exotic option barriers many, many years ago.
Option Barriers in 2003
One person asks a question about option expirations and whether they can move the market. But the discussion just did not get very far. Back then the traders did not know how to use exotic option barrier knowledge. Very few people with such knowledge back then.
Other people give up on the option barrier knowledge because they feel it is too complicated. Perhaps they are suffering from information overload?
Other people are still looking for the holy grail magic indicator and are hopping around from system to system.
Option Barriers in 2004
The discussion about option barriers re emerges in 2004.
One of the posters named “FXdealer” attempts to explain the option barriers to the people on the forum. One of the forum members “Ugly_Dog” realizes that it was the missing link and the reason why his trades on that day turned into a loser.
But, again the discussion doesn’t get very far. FXdealer only makes three posts and never posts again.
In this discussion, one of the members “fxsurfer” talks about option levels being defended. He talks about the stop losses after the option barrier.
fxsurfer also posts an option rumor from one of the forex news sources.
The discussion continues on healthily for a little bit and the traders attempt to put the pieces together. They do a decent job of it. This is back in 2004 folks!
Option Hunt in EUR/USD
The traders describe an option hunt that occurred back in December of 2004. They have a good discussion for 24 hours, then it dies out.
Here are some more moneytec threads that you can view if you want to for historical and fun sake:
Option Barrier Conclusion
As you can see option barriers have existed for many, many years. The same patterns keep repeating themselves in the market. The same human emotions keep on happening over and over again.
Option Barriers existed in 2003, they exist in 2011, and they will exist in the future.
Learn their power and incorporate them into your trading. For they are an order flow generator and true reason why the markets make some of their movements.
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