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How to Trade Japanese Yen via Options

September 14, 2010

Forex market is a big market providing round the clock trading as well as huge leverage. Leverage is a double edge sword. If you are not hedging properly, then forex trading could also mean a ticket to emptying your trading account quickly. So if you want to trade forex but still want to limit your risk exposure without gluing to screen, Forex options can offer a good alternative to trading FX spot.

Japenese Yen is currently trading at 15 year low levels. A strong yen hurts Japan which is a export driven economy. Part of the reason why it is strengthening so much against the US dollar is also attributed to Japanese govt not doing enough to stop to the rise. If I refer to USD/JPY currency pair, it is in a downtrend, a very strong one which is very close to almost 20 years low when US$1 amounted to only 79.75 JPY. As of this writing, JPY is trading almost at 1US$=83 JPY.

If you have a bullish out on JPY, YUK (Yen FX Index, Traded on ISE) can offer a better alternative as opposed to directly trading with FX spot market.

Let’s take a trade example-

If I decide to buy Oct 84 YUK calls, it was trading for $1.06 (mid price) when YUK closed at $83.7. Assuming these prices, maximum risk is only $106 and no matter how low USDJPY pair go, once can not lose more than this. However, if USDJPY rises to even ~86.5 in the next 30 days one is looking at almost doubling his/ her gains on these options.

This example is to show that without taking unnecessary risk of FX spot market, you may still benefit should the Yen rise from the bottom. Now what if it doesn’t go up but trade in a sideways range? That’s even better for option traders as you may design as many market neutral or range bound strategies for example Double Diagonals, Iron Condors, Calendars and so on which has limited risk/limited reward potential.

So next time you think of trading forex, but are scared by the negative side of leverage, give options a try. You may unearth some real money making opportunites without rising too much.

Profitable Trading, OP

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