Name That Trade – $DXJ: Big In Japan

by CC September 8, 2015 3:12 pm • Commentary

In his MorningWord earlier, Dan highlighted BK’s view from the TickerDistrict that the upcoming BOJ meeting could be as important as any action by the FOMC and the volatility in Chinese stocks in the coming weeks. Dan took a look at the technical set up for the Nikkei, identifying a fairly clear support level the equity index needs to hold to keep the rally intact, but also what could be a fairly well defined trading range in the near term for the U.S. listed Wisdom Tree Japan Hedged etf (DXJ):

DXJ 1yr chart from Bloomberg

That’s a pretty tidy trading range in the near term, some fairly important technical support down at $46, and what should be staunch resistance at $54, the level the etf broke down from in mid August.

Dan also noted that the pick up in realized volatility (how much the underlying is moving) vs implied volatility (the price of options) could provide a trading opportunity given the fact the former is above the latter for the first time in 2015.

One trader today expressed the view that at the very least that short dated, out of the money calls that capture the Sept 15th BOJ meeting are dollar cheap.  Shortly before 1pm today, when the etf was $50.28 , there was an opening buyer of 20,000 of the Sept 52 calls, paying .53 to open. They also bought 20,000 of the Sept 53 calls paying .28 to open.  These trades break-even at 52.53, up 4.5% and at 53.28, up 6% respectively on Sept expiration. In trader lingo we call that a Call Stupid.

This is not exactly how we would choose to express a directional view in DXJ, but could serve as short term leverage on an existing holding into a potential positive catalyst.  For those that think Japan equities are likely to revisit the recent lows, the Sept 50/46 put spread for about .80 is probably the best bet here. For those that think the call stupid buyer is onto something, we’d prefer spreading with implied vol so high vs what that trader did. The Sept 51/54 call spread for about .80 looks like the way to play for that move.

These are both event trades and if realized vol stays high implieds could creep up into the BOJ meeting. However, implied vols are already very high, so there’s risk if markets settle here. That’s why we like spreading an event trade, but the high implied vol is why we’re not doing any trade yet ourselves. We’ll be watching to see if there’s a better vol entry first.