Published on 07/19/2006

Derek Frey explains a bull call spread in September 2006 Japanese yen futures.

Option Idea: Bull Call Spread in Japanese Yen Futures

Market: September 2006 Japanese Yen (JYU6)
Tick value: 1 point = $12.50
Option Expiration: 09/08/06
Trade Description: Bull call Spread
Max Risk: $500
Max Profit: $3250
Risk Reward ratio 6.5:1
Buy one September 2006 Japanese Yen 88 call, while selling one September Japanese Yen 91 call. For a combined cost and risk of 40 points ($500) or less to open a position.

Technical / Fundamental Explanation
The Japanese Yen has always been a tough market to trade. The Bank of Japan(BOJ) is infamous for the manipulation of its currency. That being said, we have just recently seen a dramatic change in the BOJ policy. Last Friday (07-14-06), the BOJ raised its key overnight call rate to 0.25 percent from near zero, ditching a policy of keeping interest rates at zero that it had followed since early 2001. This should open the door to continued rate hikes in the future and shows an overall improvement in the Japanese economy. With the Japanese entering into a rate hiking cycle and the United states about to end or at least pause on its rate hiking cycle, we should see the Yen appreciate against the dollar. Fundamentally, rising interest rates is supposed to be supportive to the underlying currency. While we have seen short term Dollar strength we believe that that strength is temporary at best and this counter move has given us a great long entry on the Yen.

Profit Goal
Max profit assuming a 40 point fill is 260 points ($3250) giving this trade a 6.5:1 risk reward ratio. Max profit occurs at expiration with Japanese Yen trading above 91. The trade is profitable at expiration if the Japanese Yen is trading any where above 88.40 (break-even point).

Risk Analysis
Max risk assuming a 40 point fill is $500. This occurs at expiration with the Japanese Yen trading below 88.

Derek Frey is Head Trader at Odom & Frey Futures & Options.

Disclaimer
Past performance is not indicative of future results. Trading futures and options is not suitable for everyone. There is a substantial risk of loss in trading futures and options.