Call option squeeze drives Japan's Nikkei past 30,000, more gains seen – traders

This post was originally published on this site

TOKYO, Feb 16 (Reuters) – The Nikkei’s rapid ascent to a 30-year high above the 30,000 mark has stunned many analysts, but some traders say market hedging against call options at that level is the likely reason for the market’s gains.

Based on the size of outstanding call options and moves in the Nikkei during previous episodes of active call option trading, Japan’s benchmark stock index could add another 1,000 to 2,000 points in coming weeks, some traders say.

Any further gains from current levels are likely to fan already growing concerns about a bubble in Japanese stocks and prompt more warnings of a sudden correction lower.

“The players who sold these call options thought the Nikkei would not break 30,000, but now that it has, you could say they are caught in a squeeze,” said a trader.

“They have to hedge their losses in futures, but this only helps to push up the cash market.”

The Nikkei share average rose for a second straight session on Tuesday to 30,714.52, the highest since August 1990, and has shown no sign of slowing since breezing past 30,000 on Monday.

There are 13,059 Nikkei call option contracts outstanding with a strike price at 30,000 and a notional value of 400 billion yen ($3.79 billion) that expire on March 12, Refinitiv data shows.

The amount of calls at 30,000 dwarfs the amount of outstanding index call options at strike prices above or below that level, traders say.

The sellers of the call options have to hedge their positions because the options are more likely to be exercised when they expire, which is usually called delta hedging.

In this case, a common strategy in Japan is to buy Nikkei index futures, which are up 4.3% since last week, but this also tends to push the Nikkei higher.

“There were a lot of options and structured products tied to 30,000,” one market analyst said.

“Touch that level once and the scramble is on, because players have to buy futures to cover shorts. In the bigger picture, I do worry that we are in a repeat of past bubble markets.”

Bank of Japan Governor Haruhiko Kuroda said on Tuesday the recent stock price rally reflected market optimism over the global economic outlook, brushing aside views its ultra-loose monetary policy was fuelling an asset price bubble.

$1 = 105.6000 yen Reporting by Stanley White Editing by Vidya Ranganathan and Ana Nicolaci da Costa