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Big Yen Option Bet Risks Crushing Traders as Intervention Looms

(Bloomberg) -- The imminent expiry of nearly $3 billion in dollar-yen options has traders on edge as the Japanese currency trades at levels that might trigger government intervention.

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The yen slid to the weakest in about 34 years Wednesday, reaching 151.97 per dollar, prompting Finance Minister Shunichi Suzuki to warn of potential “bold measures” to contain further losses. That was after Japan’s top currency official, Masato Kanda, delivered his strongest intervention threat in months earlier this week.

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The latest developments are worrying news for traders who have sold dollar-yen options related to the March 28 expiration at strike 150.5 of notional $2.85 billion, the largest expiration on Depository Trust & Clearing Corp. so far this year. If they need to hedge their positions, they would be hoping for as little movement as possible, something the Ministry of Finance’s rhetoric is threatening to upend.

“Option sellers suffer from large moves as the premium they earn doesn’t cover the cost of hedging the spot movement,” said Ruchir Sharma, global head of FX option trading at Nomura International Plc in London. “Large short strikes require dealers to hedge their spot exposure, which can cause disruptive price action as they all need to aggress the market at the same time — which worsens their losses even further.”

Japan’s currency has already burned traders multiple times this year. Many hedge funds started 2024 buying options which gained in value if dollar-yen fell, only to see the pair rally as much as 5.5% in the first three weeks of the year.

They then re-entered similar positions earlier this month amid speculation the yen would strengthen after the Bank of Japan raised interest rates, but the currency dropped as the rate hike came with a pledge the central bank would remain accommodative.

The pair has been trading around 151 this week and a push toward 155 might be possible, according to Bloomberg Intelligence chief Group-of-10 FX strategist Audrey Childe-Freeman. Bank of America Corp. sees intervention risk rising if it reaches the 152-to-155 range, while a Bloomberg survey of economists found the median estimate of the yen level that would push the finance ministry to intervene is 155.

“There will be eyes on the $2.85 billion dollar-yen options trade — it is a chunky expiry,” said Mingze Wu, a currency trader at Stonex Financial in Singapore. “With investors holding short yen positions, and with even heavier intervention risks percolating, this may cause volatility in the yen.”

(Updates to add comment from finance minister in second paragraph.)

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