Trade idea background
While the overall trend in USDJPY remains positive, the latest move higher has been capped by the 61 percent retracement level in the 124.14—75.30 wave. If US non-farm payrolls (NFP) later today follows the lead of the strong ADP data results from Wednesday and surprisesto the upside with a strong reading above the 200,000 mark, the likely scenario is that USDJPY would find additional upside, with the pair usually on a good run being able to deliver more than 100 pips. We choose to approach this potential upside range expansion scenario with a relatively inexpensive, out-of-money Call option in USDJPY (please see below for trading details).
Naturally, this is a speculative bet, whereby a scenario of USDJPY going into offered mode post the data would see the Call option becoming worthless. Given the risk/reward ratio and the relatively inexpensive pricing structure, however, we find approaching the US data with a USDJPY Call option attractive.
Trade management and risk description
As this is a purchased plain vanilla Call option, the risk and the maximum loss that can be incurred is limited to the purchasing premium of the option. To lower the effective cost of the option, we choose to size the Call option as a half nominal trading size contract.
Trade idea parameters
Entry: Buy a half nominal size order USDJPY Call option, strike 105.45, expiry Monday, January 13, for an indicative price of 21 JPY pips. Spot reference 104.91.
Stop: There are no stops involved as this is a plain vanilla Call option.
Target: Target at this time is open. The break-even for this Call option is 105.45 + 0.21 = 105.66. We will update here on potential target levels but will look to lock in gain using either the spot markets or buy partially or fully selling the Call option.
Time horizon: option expiry, Monday, January 13.
USDJPY daily chart
