There could be an interesting options play in the Yen here. For anyone not following the Yen, trade has been dominated for the last few months by the tug of war between portfolio and trade inflows into Yen, and the BoJ desire to restrain the currency in order not to choke off their nascent economic recovery. Recently the BoJ has been selling Yen and buying literally tens of billions of dollars, driving the Yen from 105 down to 112. However, it now appears to have reached levels were there is little or no desire in the free market to sell Yen - the BoJ has become the only major seller. My theory is that when it stops selling, the market tends to spike quite rapidly. The two recent examples are 8th March, from 112.10 to 111.25, and earlier today, from 111.10 to 110.25. Whatever the cause of these spikes, they are clearly related to the pattern of intervention. This intervention is based on the upcoming financial year end in Japan, on 31st March - the BoJ basically wants currency losses to stay off the books for this year, allowing multinationals' balance sheets to look a lot better in their year end accounts. So, we can probably expect intervention to impact the market until the end of the month at least. Now, a market which spikes 100 ticks in one minute is rather favourable for a long options position. I am thinking that the front month straddles could be an excellent way to play this. Load up, then stick your bids and offers below and above the market, and trade the gamma for all its worth. Any comments from the options players here?
I've only traded Yen options on the CME, so I can't compare, but I would imagine the forex market options are much more liquid and voluminous. I don't need much liquidity though, so I prefer the greater transparency and simplicity of the CME. You can get volume figures from cme.com
Cutten, how do you get your orders filled -via a floor broker? I am just wondering how you benchmark your volatility to use for that day in determining spread values,et al. I know a trader who spreads options and he has a clerk who roams the pits in OJ,Sugar to ask the locals about straddle & IV values for that session. I tried using last prices thru my quote provider but they are pretty dated since the outcry pits don't have current bid/offer which renders vol "benchmarking" harder than elec option contracts. Thanks
I use a floor broker. Ask for bids & offers, then input them into the options model to get the IV. I don't usually trade volatility though, it just seemed like the straddles are cheap relative to the current market situation.
Straddles in Cocoa, coffee and OJ are cheap.don't know much about Chicago futures. Cotton straddles no matter how expensive seem to always pay for it. Look at CT`k blow thru a lot of strikes the past week! Thanks Cutten
Interesting GA - I think coffee and OJ have the potential for some volatility this year, that's for sure. So how do you trade the straddles? When there is a move do you let it run, or do you hedge your deltas strictly as they build up?
Cutten it has been a while since I gamma scalped straddles. Been trading futures mostly. Traders I know use a variety of methods, equalize per hour, per day, per delta units i.e. if got long 3 contracts,hedge. The better ones let it run basis technical analysis. the real masters hedge long straddles with sdhort straddles on other months, neutralize intermonth spread risk and play the inter month vol spreads.