Lehman Brothers has bought more than USD3 billion (notional) of one-month yen puts/U.S. dollar calls struck at JPY133 in the last three trading days, according to fx options traders on the other side of the positions. One-month volatility surged more than 1.5% during the three-day span. Traders at Lehman declined to comment.
Lehman put on the first leg of the trade, to the tune of USD2 billion, on Friday, driving implied vol up to 11.5% from 10.25% in the process, rival dealers said. The U.S. bulge bracket firm then purchased a further
USD1 billion of the out-of-the-money yen puts yesterday, as one-month implied vol surged to 11.85%. The yen hit a three-year low against the dollar Tuesday and briefly traded above JPY133 Wednesday morning in Japan before strengthening to JPY132.40 later in the day after supportive comments from a Japanese government spokesman.
Rival traders speculated Lehman took an additional USD1 billion punt Tuesday, despite the higher cost, because the yen's slide in the spot market pushed the yen puts closer to the money. "The timing, size and direction of this has ‘proprietary' or ‘hedge-fund' written all over it," noted one trader.
Traders noted the second batch of yen puts were bought with a Tokyo time cut-off, meaning although the one-month options were purchased a couple days after the initial position, the second batch will expire just 12 hours after those bought two days before. The initial options have a New York cut. "They're not the same [expiration], but they're just as good," noted one trader, adding the market was able to absorb the position despite its size. "Three yards is a large amount, but not unheard of," he added. The Tokyo cut is not necessarily an indication that the trades were done on behalf of an Asian client, but more likely a sign Lehman wanted to have the two batches of options expire at roughly the same time.
Traders are now bracing for the trade to be flipped. Given the move in spot, which briefly had the options in the money Wednesday, traders speculated Lehman may try to unwind the trades and take profits before they expire next month, assuming the yen continues to weaken. "If it goes high enough, their guy might want to just take the premium," said one trader. Another added: "At some point they need to come back and sell those options."
As a result, one trader said he is steering clear of yen puts struck around that level. "The trick is not to get long yourself, or if you do, to make sure you get rid of it before they do," he said. Still, another trader noted that while USD3 billion is substantial, he does not plan to position his book based on Lehman's holdings. He said: "Three yards is big, but it's not such a big deal that you spend your time worrying about it."
