Using yen options to trade BOJ easing

Is the hottest trade of the year too crowded?

With aggressive monetary policy shifts in Japan, trading the weakening Yen has been one of the best trades of the year, and the most popular. Japan’s Prime Minister Shinzo Abe continues to pressure the Bank of Japan (BOJ) to enact massive monetary easing programs to help stimulate the economy. The policy shift has caused the Yen to tumble against the dollar to a level not seen in almost five years. News on Wednesday morning helped accelerate the sell off causing the March Japanese Yen futures contract to gap lower. The news was that the BOJ’s governor would be stepping down earlier than expected. Although Abe has not yet named a successor, he undoubtedly will choose someone who will fall in line with his monetary policy. The short Yen trade has been one of the more crowded trades this year, but this recent development should continue to push the Yen lower as the easing in Japan is likely to accelerate.

So how much more can the Yen fall? With the Yen trading in a range that it has not seen in such a long time, picking a specific downside target level can prove to be difficult. Consideration also must be paid to the fact that we have seen the Yen rally occasionally only to see those rallies sold. So you would want to look at a strategy that can be profitable if the Yen continues to fall, consolidates or sees some profit taking.

There are a number of options strategies that would offer a trader this reward profile, but first let’s consider the different instruments you can use.

Spot currency: This is the cleanest and most direct way to trade the Yen, but the capital outlay and swings may be difficult for some traders.

ETFs: The CurrencyShares Japanese Yen Trust (FXY) is an ETF that tracks the price of the Yen. This ETF does a good job of tracking Yen performance, but options on this product do not trade a lot of volume.

Options on Yen futures: The best, most liquid way to set up a trade on risk vs. reward ratio.

The Trade:

Selling the /6J Mar .01075-.0108 Call Spread for .00003
Risk: $250 per 1 lot
Reward: $375 per 1 lot
Breakeven: .01078

This trade sets up for profitability in a flat or declining Yen market. The Yen could even rally some and the trade will end up profitable as long as it does not rally through the breakeven point. Using a trade like this allows a trader to profit in a number of different scenarios with a well-defined risk vs. reward ratio.

About the Author
James Ramelli

James Ramelli is the Moderator of the Live Futures Options Trading Room at where he actively trades futures and options on futures while educating members on strategies, setups and risk management. He has a degree in Finance with a focus in Derivatives Trading and Financial Engineering from The University of Illinois and has been trading for five years. James appears regularly on Bloomberg T.V. and BNN and writes a weekly column for Futures Magazine.

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