Last week we highlighted a bullish roll in calls in DXJ, the etf that track Japanese equities on a currency hedged basis:
DXJ: the etf that tracks Japanese equities on a currency hedged basis saw what appears to be a roll up in calls. When the etf was $49.56 a trader sold to close 16,300 Jan 49 calls at $1.41 and bought to open 16,300 Jan 51 calls for 61 cents to open. This new call position breaks-even at $51.61, up 4% from the trading level in about 6 weeks. The etf is now back to unchanged on the year, approaching key long term technical resistance at $50:
DXJ 2 year chart from Bloomberg
Earlier when the DXJ was trading $50.87 a trader sold 20,000 Feb 47 / 50 call spreads at 2.20 to close out an apparent prior bullish bet. Last night the Nikkei closed up 84 bps, its first positive close all year, up 18% from its Nov 9th post U.S. election lows, and up 30% from its 52 week lows made in February:
[caption id="attachment_68853" align="aligncenter" width="600"]
NKY 1yr chart from Bloomberg[/caption]
Taking an intermediate term view, the NKY broke a massive downtrend that had been in place from its 2015 highs, with obvious technical support at 16,000:
[caption id="attachment_68854" align="aligncenter" width="600"]
NKY 5yr chart from Bloomberg[/caption]
Taking a far longer term view, the 2015 highs like and epic double top dating back to the early 2000 high just below 21,000:
[caption id="attachment_68855" align="aligncenter" width="600"]
NKY since 1990 from Bloomberg[/caption]
Back to DXJ, continued momentum puts the Dec high in play near $55, while an early 2017 re-tracement for stocks could see indices like NKY and etfs that track them like DXJ see a move back to the recent breakout level near $46:
[caption id="attachment_68856" align="aligncenter" width="600"]
DXJ 1yr chart from Bloomberg[/caption]
Short dated options prices in DXJ are cheap, with 30 day at the money implied volatility a tad above its recent 52 week lows, with realized volatility (how much the etf is moving) picking up, nearly equal to implied vol:
[caption id="attachment_68857" align="aligncenter" width="600"]
Bloomberg[/caption]
It’s difficult to determine too much from the trader closing this bullish bet, but it will be interesting to see if these bullish trades continue to roll or are simply satisfied with the run as as and wait for a pullback to get back in.
For those looking to play for that pullback, looking out to February, a slightly out of the money put fly is probably the best bet to reduce premium risk:
DXJ ($50.50) Buy the Feb 50/45/40 put fly for 1.10
- Buy 1 Feb 50 put for 1.65
- Sell 2 Feb 45 puts at .32 (.64 total)
- Buy 1 Feb 40 put for .09
Profits: up to 3.90 between 48.90 and 41.10 with max gain of 3.90 at 45
Losses: up to 1.10 between 48.90 and 50 & between 40 and 41.10 with max loss of 1.10 below 40 and above 50.
Rationale – This put fly targets a move back to the breakout level ($45-$46) and offers a nearly 4 to 1 profit/loss potential. The break-even is 48.90 so this is only for those that think Japan has gone too far too fast as any continuation of the uptrend could mean a loss and the strikes becoming too far out of the money.