From a technical point of view, NIKKEI recent movements do not deliver any blatant signal to ground expectations on: last closure stands close to the moving average and the RSI lies flat around 50.  However, we believe it’s worth to take a stand on the general markets’ sentiment over Japan.

Specifically, BoJ speech delivered on May 22nd left a bad taste in investors’ mouths. On the one hand, it clearly repeated goals and tools of this aggressive monetary easing and hinted to embryonic but already palpable signs of efficacy; on the other hand, it tied part of these favorable signs to foreign economies’ recovery and openly expressed the issue of government bonds’ volatility and, most importantly, BoJ officials said they would accept the rise in long-term interest rates that naturally spurs from the shift of focus from safe bonds to risky investments plus a physiological surge in inflation rates.
The bottom line is: “so far so good”.  Unfortunately markets stopped looking at central banks as right-hand man of omniscient benevolent social planners long ago, and the ultimate effect of the above-mentioned press release was just not to fire markets more, rather than cool them. Indeed, few words from Ben Bernanke have been enough to make the NIKKEI dramatically plunge down.

In a nutshell, there are no good reasons to go against BoJ words on a ‘pick-up’ of Japanese economy, especially with reference to the apparently increased domestic consumption. Still, BoJ delivered a fuzzy message, analysts have not fully assess the possible impact of an exchange rate dive nor of its extent and Japanese economy seems still to be reliant on overseas exports, which cannot at all be addressed as a sure take-home.
Eventually, we expect stocks to take on investors’ uncertainty as this latter is mainly linked to real economy effects of non-fiscal choices.

For these reasons we believe that a further decline of the Nikkei index is unlike. To profit from this view we believe that the best strategy is to short put options on the index with strike 14000 and maturity 21 JUN 2013.
There are two main reasons for this trade. First, we are not exactly bullish but more precisely “not bearish” meaning that we believe that this is a low for the Nikkei but we are unsure that the strong rally can continue so we are keen on betting that the index will not go below 14000. As a result we think that the options we write will expire worthless and we will receive the time value of the options.
Second, now is the best moment to short options because of the spike in volatility (so options are rich) that occurs on Thursday after the huge decline.
This position will clearly profit from Theta and Vega, and the main risk is on delta as if the options expire in the money (so the Nikkei is below 14000 in one month) we will have to pay the difference to options holders. For risk management purpose we will only care for delta risk selling the position in case of a huge decline of the index.


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