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What are your (FX) options - Trading the USDJPY after the 148.8 breakout

Options 10 minutes to read
Koen Hoorelbeke

Investment and Options Strategist

Summary:  Exploring the aftermath of the USDJPY's breakout past 148.8, our article outlines key options strategies for traders gearing up for potential bullish, neutral, or bearish market shifts. We detail the risks, rewards, and strategic nuances of each approach, providing a roadmap for informed decision-making in the FX options market.

What are your (FX) options: Trading USDJPY after the 148.8 breakout

Introduction

The recent move of the USDJPY past the 148.8 level presents a new set of considerations for traders. Our article, "What Are Your (FX) Options: Trading USDJPY after the 148.8 Breakout," aims to provide an analysis of current options strategies in light of this development.

The breakout has brought the USDJPY to the attention of market participants, raising questions about the subsequent direction—whether the trend will continue, stabilize, or reverse. Our discussion centers around a variety of options strategies tailored to different market expectations. We offer an objective examination of each setup, considering the implications of market volatility and potential price movements on these trades.

As we explore the implications of the USDJPY breakout, we present strategies for traders to consider, whether they anticipate further strengthening, a stable range, or a decrease. The focus is on how these scenarios could affect the potential profitability and risk of options trades, with a detailed look at premiums, strikes, and expiry dates. This article is designed to inform your trading decisions with straightforward and practical financial analysis.

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

In this article we're going to cover the following strategies:

  • Bullish strategy
    • Bullish Call Debit Spread
        
  • Neutral / range bound strategy
    • Short Iron Condor
       
  • Bearish strategy
    • Bearish Put Debit Spread
 
Chart of USDJPY, showing the strike levels discussed in the article below, also showing a 1 standard deviation probability envelope

Bullish Strategy

In the first trade setup, showcasing a bullish perspective on the USDJPY pair, you engage in two actions that result in a net premium paid:

  • Trade Type: Put Call Spread
  • Action: Pay Premium
  • Expiry Date: 21-Feb-2024
  • Strike Price for Buy Call: 150.00
  • Strike Price for Sell Call: 150.50
  • Notional Amount: 200,000 (for each leg)
  • Premium Paid: 30,600 JPY

Here is the analysis of the setup:

Financial Implications:

  • Premium Paid: As the trader, you will pay a premium of 30,600 JPY upfront.
  • Maximum Risk: Your maximum risk is limited to the premium paid, which is 30,600 JPY.
  • Maximum Profit: The maximum profit is the difference between the strike prices of the two calls (50 JPY) times the notional amount (200,000) minus the premium paid, resulting in a maximum profit of 69,400 JPY.
  • Breakeven Point: The breakeven point at expiration is 150.153 JPY, which means that the price of USDJPY needs to rise above this level for the trade to be profitable.

Market Considerations:

  • The USDJPY needs to rise for this trade to be profitable. The setup is bullish, betting that the USDJPY will rise above 150.153 by the expiration date.
  • The profit potential is capped if USDJPY rises above 150.50, as profits from the bought call option will be offset by the losses from the call option sold.
  • The delta of the options indicates how much the price of the options will move for a one-point change in the underlying currency pair. In your case, the delta suggests moderate sensitivity to USDJPY price movements.

Strategy Summary:

This bullish put call spread is a moderate bullish strategy with defined risk and reward. It is suitable if you expect a moderate rise in the USDJPY pair, but not beyond 150.50. Your risk is limited to the premium paid, and no additional margin is required since it is a debit spread (you paid a net premium). The effectiveness of this trade will depend on the USDJPY's performance and the volatility of the market leading up to the expiry date.

Neutral / Range Bound Strategy

Neutral trading setup: Selling (short) an iron condor

In the short iron condor strategy outlined by the second setup, you are employing a neutral position on the USDJPY, where you anticipate that the price will not move significantly and will remain within a certain range. This strategy involves the following actions:

  • Sell 1 Call with a strike price of 150.00
  • Sell 1 Put with a strike price of 148.50
  • Buy 1 Put with a strike price of 147.50
  • Buy 1 Call with a strike price of 151.00

All options have the same expiry date of 21-Feb-2024 and a notional amount of 200,000 units.

Financial Implications:

  • Premium Received: For initiating this trade, you receive a net premium of 77,400 JPY.
  • Maximum Risk: The maximum risk is quite substantial at 122,600 JPY, which will occur if the USDJPY moves significantly away from the strikes of the sold options.
  • Maximum Profit: The maximum profit is limited to the net premium received, which is 77,400 JPY.
  • Breakeven Points: There are two breakeven points for this strategy, at 148.113 and 150.387 JPY. The strategy profits as long as the USDJPY price stays between these two points.

Market Considerations:

  • This strategy suggests a neutral outlook for the USDJPY, expecting it to stay within a range around the current price level.
  • The trade is structured as an iron condor, which profits from low volatility and the passage of time, provided the price of the underlying stays within a certain range.
  • The deltas of the options indicate that the positions are relatively balanced in terms of exposure to price movement, but there's still more risk if the price moves lower due to the higher absolute delta of the puts.

Strategy Summary:

This neutral strategy, known as an iron condor, involves selling a higher strike call and a lower strike put, while protecting yourself by buying a call with an even higher strike and a put with an even lower strike. It’s a premium collection strategy that benefits from time decay and low volatility, with the trade-off being the substantial risk if the USDJPY moves significantly in either direction.

The initial margin impact is 459.61 EUR, which is the amount required to hold the position open due to its risk profile. Margin is shown in EUR, which is the base-currency for this account. If you have a different base-currency, it will be shown in your base-currency.

Bearish Strategy

Bearish trading setup: Bear Call Spread

In this Bear Put Spread strategy, you take a bearish position on the USDJPY pair. This strategy involves:

Trade Setup:

  • Buy 1 Put with a strike price of 148.50
  • Sell 1 Put with a strike price of 148.00
  • Expiry Date: 21-Feb-2024
  • Notional Amount: 200,000 for each leg
  • Premium Paid: 40,600 JPY

Financial Implications:

  • Premium Paid: You will need to pay a net premium of 40,600 JPY to establish this position.
  • Maximum Risk: The maximum risk is limited to the premium paid, which is 40,600 JPY.
  • Maximum Profit: The maximum profit is the difference between the strike prices (50 JPY) times the notional amount (200,000), minus the net premium paid, resulting in a potential maximum profit of 59,400 JPY.
  • Breakeven Point: The breakeven for this trade is at 148.297 JPY, which means the USDJPY needs to fall below this level for the trade to be profitable.

Market Considerations:

  • This strategy indicates a bearish outlook, expecting a decline in the USDJPY below the breakeven point by expiration.
  • Since this is a vertical spread, it benefits from a move in the underlying currency pair below the breakeven point, with the maximum profit occurring if the USDJPY falls to or below 148.00 JPY.
  • The delta values suggest a modest negative directional bias, indicating the options will increase in value if the USDJPY falls, with more significant gains coming from the bought put due to its higher delta.

Strategy Summary:

The bearish put spread is a directional trade that expresses a bearish view on the USDJPY currency pair. By buying a put and selling another put with a lower strike, you create a position that has a defined maximum risk (the premium paid) and a defined maximum profit (the difference between the strike prices minus the premium paid).

Conclusion

As we conclude our examination of the USDJPY post-148.8 breakout, it is clear that the currency pair's journey is subject to multiple influencing factors, from geopolitical shifts to economic data releases. Each of the options strategies outlined in this article caters to a different forecast for the pair's trajectory—bullish, neutral, or bearish.

Traders should weigh these setups against their risk appetite and market outlook. The bullish put call spread may appeal to those expecting a continued rise, while the iron condor could be suitable for a range-bound scenario, and the bearish put spread might be favored by those anticipating a downturn.

In light of the USDJPY's current position, it is prudent for traders to remain vigilant, monitoring market signals closely and being prepared to adjust strategies as new information unfolds. Whether the breakout will sustain its momentum or falter remains to be seen, but equipped with the right options strategies, traders can navigate the market with a measure of confidence and control over their risk exposure.

Ultimately, the choice of strategy should align with a comprehensive view of market conditions and personal investment goals. As with any trading endeavor, the importance of due diligence and continuous learning cannot be overstressed. We hope that our analysis aids in crafting a well-informed approach to trading USDJPY options in this complex and evolving market landscape.

For continuous insights and updates on market/options strategies, interact with me/follow my social media account on Threads. 

Previous "What are your options" articles: 

Previous podcasts:

Previous Volatility Reports: 

Related articles:

Previous "Investing with options" articles: 

 

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.

This article may or may not have been enriched with the support of advanced AI technology, including OpenAI's ChatGPT and/or other similar platforms. The initial setup, research and final proofing are done by the author.

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