Analysis & Opinion

* Calls outpace puts in ETFs tracking Japan equities, yen

* Call buying active in Japan EWJ ETF Jan 2014 $13 strike

* Leveraged YCS fund calls busy, more yen weakness seen

April 4 (Reuters) — The Bank of Japan’s bigger-than-expected stimulus plan triggered a flurry of option-market bets on more gains in Japanese stocks and losses in the yen, as investors expect the massive plan will strengthen Japan’s economy and further weaken its currency.

Call option traffic was concentrated in exchange-traded funds that track Japanese equities, along with speculative trades on leveraged funds that rally when the yen weakens.

The Bank of Japan, in a radical overhaul of its monetary policy, on Thursday promised to inject about $1.4 trillion into the economy in less than two years.

This was more than anticipated, and triggered a sharp selloff in the yen, which lost more than 3 percent Thursday in its worst day against the dollar since 2008, while Japanese 10-year government yields hit record lows.

Any ETF with the word ‘Japan’ in it saw a large gap open this morning, said Steve Place, a founder of options analytics firm investingwithoptions in Mobile Alabama.

Volume on the Japanese stock-focused ETFs was dominated by calls, contracts which grant investors the right to buy the shares of these securities by a certain date. In fact, calls outpaced puts by a wide margin in the WisdomTree Japan Hedged Equity ETF and the iShares MSCI Japan Index Fund .

The DXJ is a slightly more complex product than EWJ, as it combines long Japanese equities with currency hedging.

Similar to the U.S. Federal Reserve’s monetary stimulus, which has boosted U.S. stocks, the expectation is that Japanese equities will remain buoyant given the massive commitment from the Bank of Japan, said Gareth Feighery, a founder of options education firm www.marketTamer.com.

Among options traders, the trade thesis is very simple: this initial move in the Japanese markets will continue, he said.

Shares of the DXJ ended 7.49 percent higher to $43.88 and the EWJ ETF rose 4.1 percent to $10.90. Option volume in both products was above the daily average, according to options analytics firm Trade Alert. In all, 56,000 calls and 4,420 puts changed hands in the EWJ, 3.3 times the typical levels.

STRONG DEMAND FOR JANUARY CALLS

More than 21,000 January $13 strike calls were purchased in the EWJ ETF on Thursday, strategists said. Open interest prior to Thursday was just 510 contracts, indicating a big increase in new positions, Trade Alert data show.

The buying in that January $13 strike came in large blocks, indicating aggressive customers looking for at least a 20 percent rise by late January 2014 expiration, said Place of investingwithoptions.

That suggests that traders believe that the true effect of the Bank of Japan’s action on its equities market will not be felt for six months or longer, said TD Ameritrade chief derivatives strategist J.J. Kinahan.

The DXJ attracted heavy call buying as well, but Place noted the options for this product are not as liquid as EWJ. Total call volume on the DXJ rose to 7,483 contracts, five times its daily average, Trade Alert data show.

But Place noted the option action in the DXJ consisted of call buying and large spread orders, indicating that the option transaction was tied off with another position.

Another beneficiary of the activity has been WisdomTree Investments Inc, the manager of the DXJ ETF, which is up 68 percent since the beginning of 2013.

That is the asset manager of DXJ, and has seen large influxes of capital due to the success of their funds, Place said. The momentum may continue as this Japan news continues to bring in more investors into their holdings.

The DXJ has seen inflows of nearly $4 billion in the first three months of 2013, more than nearly every other U.S. ETF, according to Lipper, a unit of Thomson Reuters.

BETTING AGAINST THE YEN

Bullish flow was detected in the options of the ProShares UltraShort Yen ETF, which tracks twice the inverse daily performance of the Japanese yen’s price change versus the U.S. dollar. The fund gained 6.9 percent to $61.42 on Thursday as the yen slumped and call action was busy in anticipation of further yen weakness, said WhatsTrading.com options strategist Frederic Ruffy.

Overall option volume was 3.7 times greater than average with a total of 4,933 calls and 832 puts traded on YCS, figures from Trade Alert showed.