BUZZ-COMMENT-Low cost options to capitalise on further JPY strength

Feb 26 (Reuters) - Options to protect against further JPY strength have been popular and their premiums have consequently increased, but there are still some low-cost opportunities to participate in any further JPY gains.

With USD/JPY implied volatility and its downside over upside strike premiums at 2025 highs, the risk of buying regular vanilla options from current levels is more likely to outweigh any reward. However, buying an outright JPY call against selling another - further from the current spot price - will significantly reduce the cost, as will adding a knock-out trigger.

The only disadvantage of those strategies is that the profit potential is limited to the lower strike, or the trigger, with the latter actually killing the option if touched. The trigger option will therefore offer the biggest discount to the plain vanilla, so it would benefit from being positioned below a potential target zone that may already contain some key support or other option-related barriers.

For example, with USD/JPY spot at 149.50 and benchmark 1-month option implied volatility at 11.0, a 1-month expiry 149.00 JPY call/USD put, which allows the holder to sell USD/JPY at 149.00 at expiry, has a premium of 185 JPY pips (break-even 147.65). However, adding a 145.00 knock-out trigger reduces that premium to just 25 JPY pips, so profit if spot is below 148.75 at expiry, but has not traded at 145.00 at any time prior.

A similar strategy could also be employed in other JPY-related currency pairs. Placing strikes further from the current spot zone will reduce premiums more, as will bringing triggers closer to the strike price.

For more click on FXBUZ