USD/JPY volatility trade with options

The Japanese yen touched an 18 month high against the US dollar yesterday when it reached the level of 105.54, before retracing to higher levels above 106.00. This sharp rally for the yen started last Thursday when the Bank of Japan (BoJ) decided to hold steady on monetary policy at its scheduled meeting. The markets had geared up for some more quantitative easing, another interest rate decrease, or even a mixture of both.

When the BoJ made the announcement of no additional measures, the USDJPY dropped 250 basis points, or 2.24%, reaching 108.735 in the space of 5 minutes. The yen rally didn’t stop there as the USDJPY closed the day at 108.087. Friday saw the rally continue further as price dropped to 106.25. Yesterday the BoJ governor Kuroda stated that a high value of the yen was not a good thing for the Japanese economy and was not welcome, this may have caused the decline in the dollar to stop and reversed the market trend, although that may be only temporary.

The USDJPY has a strong correlation to the US economy; a strong economy will usually lead to a higher exchange rate for the dollar against the yen. This Friday afternoon at 12:30 GMT we have Non-Farm Payrolls (NFP) and unemployment data for the US. The forecast for this month’s data is at 200k new jobs, slightly lower than last month’s 215k.

A large enough deviation from the expected number will create an increase in volatility for the USDJPY, as NFP is considered one of the strongest indicators of the health of the US economy. A low number will also decrease the likelihood of an interest rate hike in the immediate future; this should cause the US dollar to weaken even further against the yen. However, a higher number should send the US dollar higher again, as the market will perceive greater chances of an interest rate hike.

If you expect USDJPY volatility to increase over the next week then you may buy a Straddle strategy which consists of simultaneously buying a Call and a Put option with the same strike, expiry and amount.

The screenshot below shows a Buy Straddle strategy for USDJPY with a 106.185 strike, 7 day expiry and for $10,000 would cost $159.67, which would also be the maximum risk.

The screenshot below shows the profit and loss profile of the above Buy Straddle strategy, just click the scenarios button.

On the other hand, if you feel that the volatility for this currency pair will decline or stay flat over the next week, then you may Sell a Straddle strategy, which consists of simultaneously selling a Call and a Put option with the same strike, expiry and amount.

The screenshot below shows a USDJPY Sell Straddle with a 106.182 strike, 7 day expiry and for $10,000 would generate $142.55 of revenue with a total risk of $342.55.

This screenshot shows the profit and loss profile of the above Sell Straddle strategy.