BUZZ-Explainer-The critical importance of FX option strike expiries

Feb 28 (Reuters) - While it's not an exact science, larger impending FX option strikes can often have an effect on the FX spot market as their expiries draw closer. Here's why.

While there are many types of traders and investors influencing the FX markets, perhaps the most important when it comes to options are the many institutions that supply and manage liquidity. They may have hundreds of trades on their books at any one time, which require constant hedging to minimise exposure to the related currency pairs - often with cash.

Those using FX options to trade FX volatility will also be heavily involved in the cash market, constantly adjusting positions to offset currency risk and thereby monetising the FX volatility.

As the option expiry approaches - 10am New York for G10 currency pairs - these hedging flows will typically increase as that cash-versus-option relationship becomes more crucial to profit and loss. If an option is likely to be exercised, the opposing party may need to buy/sell more of the underlying currency to meet their obligation.

If the option strike is near the current FX spot price, these hedging flows can often drive the FX spot market towards the strikes and help to contain price action until they expire, so it's worth knowing where they reside in advance.

EUR/USD is prime example with billions of euros of strikes within the recent 1.04-1.05 range expiring of late. EUR/USD now finds itself within a massive 8-billion euros of strikes between 1.0380-1.0430 that expire at 10-am New York/15.00 GMT on Friday.

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