How to Trade Japanese Yen via Options
Published on September 14, 2010
How to Trade Japanese Yen via Options
Forex market is a big market providing round the clock trading as well as huge leverage. Leverage is a double edge sword. If you are not hedging properly, then forex trading could also mean a ticket to emptying your trading account quickly. So if you want to trade forex but still want to limit your risk exposure without gluing to screen, Forex options can offer a good alternative to trading FX spot.
Japenese Yen is currently trading at 15 year low levels. A strong yen hurts Japan which is a export driven economy. Part of the reason why it is strengthening so much against the US dollar is also attributed to Japanese govt not doing enough to stop to the rise. If I refer to USD/JPY currency pair, it is in a downtrend, a very strong one which is very close to almost 20 years low when US$1 amounted to only 79.75 JPY. As of this writing, JPY is trading almost at 1US$=83 JPY.
If you have a bullish out on JPY, YUK (Yen FX Index, Traded on ISE) can offer a better alternative as opposed to directly trading with FX spot market.
Let’s take a trade example-
If I decide to buy Oct 84 YUK calls, it was trading for $1.06 (mid price) when YUK closed at $83.7. Assuming these prices, maximum risk is only $106 and no matter how low USDJPY pair go, once can not lose more than this. However, if USDJPY rises to even ~86.5 in the next 30 days one is looking at almost doubling his/ her gains on these options.
This example is to show that without taking unnecessary risk of FX spot market, you may still benefit should the Yen rise from the bottom. Now what if it doesn’t go up but trade in a sideways range? That’s even better for option traders as you may design as many market neutral or range bound strategies for example Double Diagonals, Iron Condors, Calendars and so on which has limited risk/limited reward potential.
So next time you think of trading forex, but are scared by the negative side of leverage, give options a try. You may unearth some real money making opportunites without rising too much.
Profitable Trading, OP
Are there indexes available for other currency pairs like EUR/USD, GBP/USD etc?
I find there’s more liquidity in the currencyshares etfs like FXY and FXE. Do you see any advantages for YUK over FXY?
@dhina
There are many. For EUR/USD it is called EUU, FXE
@steve
How are you?
Yes, it is a combination of liquidity, bid/ask spread as well. One key advantage of YUK over FXE is the bid/ask spread especially for the ATM options is roughly $0.15 for Oct Options, $0.20 for Dec options as opposed to YUK which is roughly half. But at times, the liquidity make overtake the bid/ask spread. Other subtle difference is the trading hr and you may better capitalize on YUK vs FXY.
If you are bullish on Yen, don’t you buy put? The exchange rate will be lower when Yen goes up (US dollar goes down against Yen).
@Matthew
Long YUK ~ = USD/JPY pair, so if one is bullish on US$ with respect to JPY then one will buy YUK calls.
Japan Intervenes for First Time Since 2004 to Rein in Yen, USDJPY pair is up almost 200 pips; the YUK calls should almost gains at least +50% when markets opens and if Yen stays at the same level as of this writing.
http://www.bloomberg.com/news/2010-09-15/japan-intervenes-for-first-time-since-2004-as-yen-surge-threatens-recovery.html
Those YUK calls have resulted in over +135% gains; I have closed only 1/2 of the positions
Congratulations to those who played.
[…] We were stopped out of TLT, TIN was almost break-even. MOS generated +12 to +17% gains for one day holding, JPM generated from -55% loss to +100% profits; then we had great wins/partial loss on USDJPY pair via YUK calls […]
which platform do you use to buy a usdjpy put? in the usa i cannot find any platform that does it for individual investors. thanks
@anar, you can buy using Interactive brokers, and the symbol for JPY futures is /6j.