Speculators Increase Dollar-Yen Straddle Purchases, MUFG Says

Speculators and banks bought about 20 percent more than the daily average of dollar-yen options known as straddles to hedge against a fall in the U.S. currency, said Takeharu Miki, at Bank of Tokyo-Mitsubishi UFJ Ltd.

The speculators purchased $700 million of the straddles, a call and put option with the same strike price and duration, as the dollar slid to a an almost three-month low. Calls grant the right to buy, while puts grant the right to sell.

The options traded at an implied volatility of 12.5 percent and expire in one month with a strike price near current levels, Miki, a currency options manager, said. Traders quote implied volatility, a measure of expectations for future currency swings, as part of pricing options.

``The options market was short in dollar puts, and now that the spot market has moved lower market makers are in a panic,'' said Miki of Bank of Tokyo-Mitsubishi UFJ, a unit of Japan's biggest publicly traded lender by assets. ``Implied volatility should be well supported. Customers want to buy yen calls and market makers want to cover their short positions.''

The dollar fell as low as 112.10 yen before trading at 112.75 as of 3:27 p.m. in Tokyo from 112.63 yen yesterday when it slumped 1.8 percent. The U.S. currency has weakened after Chinese officials said they may diversify their $1.43 trillion of foreign exchange reserves out of dollars.

Volatility implied by dollar-yen options expiring in one month with a strike price near current levels rose to 12.55 percent from 11.56 percent yesterday. One-month volatility earlier gained to 12.61 percent, the highest since 12.78 percent on Sept. 12. A short is when a trader sells an option.
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