Waterfield
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it's called backlinking
TRADEFUTURES
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thats why this is a good bet IMO
Jason Rogers
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Retail sentiment (or positioning) has been long USD/JPY for a quite a while. Here's the DailyFX SSI graph which plots FXCM's retail trader positioning:
The green/red bars on the chart are measuring the net difference between buyers and sellers. If there are more buyers than sellers, positioning is net long and denoted by a green bar. If there are more sellers than buyers, positioning is net short and denoted by a red bar. You can see that right before July the red bars (net short positioning) flipped to green which means traders went net long USD/JPY.
The most recent SSI reading was 5.55 meaning that there were 5.55 long positions in USD/JPY for every short position. In other words, nearly 85% of open positions were long USD/JPY.
Also take a look at the bottom of the chart, there are two lines. The green line displays the number of long positions and the red displays the number of short positions. Short positions have remained constant while long positions have continuously increased as the USD/JPY drops.
In short, retail traders are attempting to pick a bottom in USD/JPY.
GammaJammer
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The problem is, with local japanese retail margins squeezed since August, usdjpy risks trading even more like it's awash with gamma this time around. or, more realistically, topside moves capped or at least slowed, whilst every little lurch on the downside squeezes out a bunch of weak positions. It may well go eventually if / when the MoF feel they have to step in, but the structural issues may well make it painful until such a time.
jon1971
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Yeah I did see it on Daily FX, thanks for the link..
scose-no-doubt
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Okay now this bit again in English.
GammaJammer
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Tad busy- sorry. Will try and answer when I have a second, later...
obv not a substitute to what GJ has to say, but a little primer...
http://www.trade2win.com/knowledge/articles/general_articles/gamma-and-fx-trader/
http://www.trade2win.com/knowledge/articles/general_articles/gamma-and-fx-trader/
meanreversion
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GJ is alluding to the sluggish downward path of USD/JPY spot being indicative that option desks are long of gamma, i.e. they are buying $ on the way down. I suspect there might be some short term RKOs with barriers slightly lower ... all hell could break loose once these are triggered.
scose-no-doubt
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RKO's?
jon1971
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Sick as the proverbial, well as you're aware BOJ finally stepped in last night, and I really wish I could say I was taking the rest of the month off and going on holiday.
I was long with some size from the 82.90 area last night, however I closed everything before going to bed as there was little sign of a bounce, and due to the perceived downside risk.
Anyone care to make a call on retrace levels?
I was long with some size from the 82.90 area last night, however I closed everything before going to bed as there was little sign of a bounce, and due to the perceived downside risk.
Anyone care to make a call on retrace levels?
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I think he means Reverse Knock-Outs
scose-no-doubt
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Never even heard of those before today. What's the appeal of those? Lower premiums? Bit risky trading those on USD/JPY isn;t it?
meanreversion
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The original style of knockout had the barrier on the out-of-the-money side of the strike, e.g. 1mth 86 USD put with K/O at 90. Then some bright spark had the idea of placing the barrier on the IN-the-money side, e.g. 1mth 86 USD put with K/O at 82. This requires a different formula and was labelled a "reverse" knockout, or RKO for short.
RKOs quickly became popular because of their low premium, but there is of course a high chance that either 1) the thing triggers or 2) it finishes out of the money.
The problem with trying to hedge RKOs is that as they approach expiry, the greeks close to the barrier head to infinity. Think about this.. let's say you're long the 86 USD put with RKO at 82 and spot is at 82.10 with 1 minute left.. you can quickly see that your delta (P/L change for a move in spot) is simply enormous. 10 pips lower and the option is worth nothing, or if spot stays where it is it will be worth nearly 400 pips.
The impact of option desks selling RKOs to clients is that they (the option traders) become long of gamma as spot approaches the barrier. This can have the effect of damping spot, because the traders will be buying $ on the way down.
RKOs quickly became popular because of their low premium, but there is of course a high chance that either 1) the thing triggers or 2) it finishes out of the money.
The problem with trying to hedge RKOs is that as they approach expiry, the greeks close to the barrier head to infinity. Think about this.. let's say you're long the 86 USD put with RKO at 82 and spot is at 82.10 with 1 minute left.. you can quickly see that your delta (P/L change for a move in spot) is simply enormous. 10 pips lower and the option is worth nothing, or if spot stays where it is it will be worth nearly 400 pips.
The impact of option desks selling RKOs to clients is that they (the option traders) become long of gamma as spot approaches the barrier. This can have the effect of damping spot, because the traders will be buying $ on the way down.
scose-no-doubt
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You know what... that post has made me realise just how extremely stupid and narrow minded I have been by not considering markets from a sell-side perspective.
Buy side or sell side move the most size?
Buy side or sell side move the most size?
meanreversion
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Well think about it like this .. let's say Joe High Net Worth bought $10mio of this option at 0.50 pct (=$50k), he knows that this is the most he can lose.
The option trader who sold it has hundreds of other options in his book but come the day of expiry, he has a very powerful incentive to try to jam the barrier if spot is very close, because the P/L change is $500k.
It's unlikely "Joe" will try to defend his barrier but very likely the bank will try to force it through, so chances are it will trade (if it gets close enough).
Now, if the client is a big hedge fund (or even a sovereign wealth fund) the dynamic starts to change.
The option trader who sold it has hundreds of other options in his book but come the day of expiry, he has a very powerful incentive to try to jam the barrier if spot is very close, because the P/L change is $500k.
It's unlikely "Joe" will try to defend his barrier but very likely the bank will try to force it through, so chances are it will trade (if it gets close enough).
Now, if the client is a big hedge fund (or even a sovereign wealth fund) the dynamic starts to change.
If BOJ think that 82.86 is the base, why disagree with them. For the time being I would avoid trading Yen.
PS They would probably intervene more than once.
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jon1971
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Agree, they have stated that they intend to intervene again IF IT BECOMES NECESSARY and have said that they would do so as early as today's US session.
Absolutely gutted tho' if I'd left the trade on I'd be close to being back to BE on account equity (I'm 6 months into my second account and clearly still learning).
Cheers...
