Bloomberg News

Japan Puts Cheapest Ever as Traders Seek Banking Haven: Options

September 30, 2011

Sept. 30 (Bloomberg) -- Japanese options are the cheapest ever compared with U.S. contracts as traders bet the Nikkei-225 Stock Average, which has the smallest financials weighting among the biggest nations, is a haven as shares fall globally.

Implied volatility, the key gauge of options prices, for three-month contracts on the iShares MSCI Japan Index exchange- traded fund is 5.69 points lower than the figure for the SPDR S&P 500 ETF Trust. That’s an increase from 1.02 points on Aug. 29, according to data compiled by Bloomberg. The gap surged to a record 6.24 points on Sept. 22.

Investors are betting Japanese stocks have less risk after the Nikkei gained 1.1 percent since March 15, its low point following the nation’s record earthquake and tsunami. The Standard & Poor’s 500 Index fell 9.5 percent during the same period on concern the European debt crisis will curb global economic growth. Financial companies, which led declines in the U.S. gauge since this year’s peak in April, make up more than 13 percent of the S&P 500 and 6.4 percent of Japan’s Nikkei.

“It doesn’t seem like Japan is on the radar much for potential problems,” Sean Heron, who manages options strategies at Glenmede Trust Co., said in a telephone interview yesterday. The Philadelphia-based firm oversees $20 billion. “The U.S. is not out of the woods yet with its problems and Japan’s were earthquake-related and not ongoing. They’re going to price it this way until the U.S. calms down or there’s another big event in Asia.”

Peak After Quake

The Chicago Board Options Exchange Volatility Index, known as the VIX, has surged 119 percent in 2011, more than Japan’s Nikkei Stock Average Volatility Index, which is up 88 percent. The VIX rose 11 percent to 42.96 today. It peaked this year at a two-year high of 48 on Aug. 8. The Nikkei volatility gauge added 0.1 percent to 35.36 today, down from 69.88 on March 15, following the earthquake. Europe’s VStoxx Index, which measures the cost of protection against Euro Stoxx 50 Index losses, gained 5 percent to 46.68.

The Topix index slipped 0.2 percent to 761.17 today. The Nikkei 225 fell less than 0.1 percent to 8,700.29. For the week, the gauge gained 1.6 percent amid signs Europe’s policy makers may resolve the region’s debt-crisis.

U.S. financial stocks are moving in tandem with European bank stocks, the center of concern about a potential recession, more than Japanese counterparts. The 30-day correlation coefficient between the S&P 500 Financials Index and the banking group in the Stoxx Europe 600 Index has averaged 0.65 in 2011, according to data compiled by Bloomberg. The figure for European banks and Japan’s Topix Banks Index is 0.25. Readings of 1 mean prices are moving in lockstep.

‘Relative Calm’

“The Japan index could be a port of relative calm,” Alec Levine, an equity derivatives strategist at Newedge Group SA in New York, said in a Sept. 27 telephone interview. The Asian nation is “less exposed to financial contagion than the S&P or the Euro Stoxx.”

Japan’s companies wouldn’t be insulated from a recession in Europe because the Asian country is a net exporter and would feel the effects of slowdowns elsewhere, Daniel Genter, who oversees about $3.7 billion as president of RNC Genter Capital Management in Los Angeles, said in a phone interview yesterday.

U.S. Treasury Secretary Timothy F. Geithner said last week at the annual meeting of the International Monetary Fund in Washington that failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.” Growth in the world economy will be slow and downside risks are “piling up,” IMF Managing Director Christine Lagarde said at a Sept. 23 meeting in Washington.

Japan ETF

The S&P 500 lost 15 percent from its April 29 high amid concern Europe can’t contain its sovereign debt crisis and economic growth worldwide will slow. The S&P 500 Financials Index fell 25 percent, the most among 10 major groups. In Europe, the Stoxx 600 Banks Index sank 32 percent.

The Japan ETF, which trades in the U.S., has fallen 7.8 percent since April 29, and is down 11 percent this year. It tracks 310 companies including Toyota Motor Corp., Mitsubishi UFJ Financial Group Inc., Honda Motor Co. and Canon Inc., which have the four largest weightings. They make up 12 percent of the index.

“The options market is suggesting that Japan may not be so affected from the crisis in Europe,” Bhavin Patel, an equity- derivatives strategist at Royal Bank of Scotland Group Plc in London, said in a Sept. 27 telephone interview. “It had already sold off before, so when the crisis came, it wasn’t so aggressive in terms of a selloff. Hence volatility has remained subdued relative to the U.S.”

‘Best Places’

The relative discount for Japan options means that investors have a cheaper alternative for buying protection against a plunge in global stocks if a Greek default roils markets, said Rohit Bhatia, a New York-based options strategist at Barclays Plc, the top-ranked equity-linked strategies team in Institutional Investor magazine’s 2010 survey.

“Nikkei really stands up as one of the best places to buy puts,” Bhatia said in a Sept. 27 telephone interview. “If things turn really bad, you wouldn’t expect anyone to escape, and in that sense low volatility means it’s a good hedge if things take a turn like 2008.”

Three-month implied volatility for the Japan ETF is 28.49, or 5.69 points below the level for the S&P 500 fund. Since the Japanese security began trading in 2005, it has on average been priced 3.17 points higher than the U.S. fund, with spikes to 16.92 points in October 2008 and 16.65 points in March 2011.

“People are more afraid about what’s going on here and in Europe than they are in Japan,” said Chicago-based Christopher Rich, head options strategist at JonesTrading Institutional Services LLC. “The volatility that we’re having on a daily basis in the U.S. is an indication of the complete uncertainty.”

--With assistance from Whitney Kisling and Kaitlyn Kiernan in New York and Lynn Thomasson in Hong Kong. Editors: Joanna Ossinger, Nick Baker

To contact the reporters on this story: Cecile Vannucci in Amsterdam at; Jeff Kearns in New York at

To contact the editors responsible for this story: Nick Baker at; Andrew Rummer at

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