* 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
By Doris Frankel
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
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
"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
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.