Friday, April 5, 2013

A Speculative Options Positon in Japan (EWJ)

Japan and their new aggressive monetary policy has been in the news recently. Let me be clear that CCI is not a currency expert or trader, and also is not bullish on Japan over the longer term.  However, common sense seems to indicate that a dramatic change in their monetary policy might create some speculative trading opportunities around the Japanese market.

CCI has most often seen the Wisdom Tree Japanese Hedged Equity ETF (dxj) as the recommended way to play this macro development. That made sense to me, and in full disclosure, I established a position in this etf in my core account awhile ago. It has indeed performed nicely.  It might have some more room to move, but I'll be inclined to take profits if  that trades gets too much more publicity and/or moves too much higher. I'd also expect the Bank of Japan to get international pressure to move slower, and hence the hedging aspect of this etf might become less useful in the future.

However, CCI was also looking for a more speculative way to have some leveraged exposure to the market in Japan in the event it continues to pop.   The following position was established over the course of this week.  Unfortunately, current conditions may not allow readers to establish a similar position, but hopefully it provides the reader some food for thought and/or awareness to consider establishing this type of  position if opportunity does represent itself.

Early in the week with the ishares Japan index (ewj) had a sell off and was trading around $10.50.  At that time, CCI sold the Jan 14 $10 put and bought the Jan 14 $11 call.  This was established for a modest $.09 credit/contract.   This risk reversal position was essentially a synthetic long position in the stock with a slight reduction in total risk capital and even less buying power consumed.  Fortunately, later in the week based on the actions of the Bank of Japan  EWJ jumped to near $11.  At that time CCI spread off both sides of the position by buying the Jan 14 $9 put and selling the Jan 14 $13 call for a $.04/contract debit. 

This leaves CCI with very little capital at risk, and a 2:1 speculative profit potential based on a significant move in  EWJ's price by the end of the year. (all gain/loss are per/contract)
  • $8   (down about 27%) - lose $100
  • $9   (down about 19%) - lose $100
  • $10 (down about 9%) - make $5
  • $11 (flat) - make $5
  • $12 (up about 9%) - make $100
  • $13 (up about 18%) - make $200
  • $14 (up about 27%) - make $200
Now it is time to sit tight for awhile, and see how this settles out after the news cycle moves on.

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