Time to Short the Yen Again

The Japanese yen has been flat lining since the tsunami struck in March of last year and was quickly followed by the nuclear meltdown and an economic collapse. In the meantime, the country’s long term structural problems have gotten steadily worse.

Last week, the yen was driven back to the very top of the range with a modest “RISK OFF” trade in the global financial markets that has so far only lasted three days. It was enough to take the (FXY) from $125.80 to $129.10, a big move for such a normally quiescent currency. So I am going to buy the Currency Shares Japanese Yen Trust ETF (FXY) March 2012 $129 puts at $1.60 or best.

Because the yen has been stuck in such a narrow range for so long, the options are fantastically cheap. You can buy the March Yen puts with an implied volatility of only 8%, compared to 50% for the (UNG) puts, and a nose bleeding 80% for the (VIX) calls. Break out of this range, and these implieds, and put prices, go through the roof.

If the yen moves back to the bottom end of this range, which appears on the charts etched in stone, then you should get a triple on the puts. If the rapid deterioration of Japan’s horrific fundamentals starts to accelerate, then you could get a downside breakout on the (FXE) and far larger profits that many hedge fund managers have been calling for.

Those unable to execute trades in options can buy the Pro Shares Ultra Short Yen ETF (YCS), a double leveraged bet that the yen goes down.

I also have a tactical reason for putting on a short yen trade here. A short position in the yen is clearly a “RISK OFF” trade, a place that people can go when they are feeling good about the world. I can use this to counterbalance my existing “RISK ON” positions in the (SPY), the (EUO), and the (SDS). With a balanced portfolio I can simply sell whatever is up, buy more of whatever is down, and hopefully make money hand over fist. This is the approach that I used to such great effect last year.

For a much more detailed explanation of the problems besetting the Land of the Rising Sun, please click here for “Is This the Chink in Japan’s Armor?” by clicking here.

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