Put volume in iShares Japan ETF hits record on volatility outlook
* Put volume hits highest level since March 2011-Trade Alert
* Trading heavy in November $11 strike puts this week
By Doris Frankel
Oct 10 (Reuters) - Option investors appear to be bracing for more volatility in the Japanese equities market within the next few weeks by trading options in combinations with stock on the iShares MSCI Japan Index fund.
Heavy trading in the iShares MSCI Japan Index fund's November $11 strike puts sent put volume on the exchange-traded fund to record levels earlier this week.
The ETF, which tracks the performance of Japanese equities, was up 1.06 percent to $11.88 on Thursday.
"The buyer ... is anticipating greater-than-expected movement in the shares of the fund in either direction between now and November expiration," said Dan Nathan, a co-founder of options trading firm RiskReversal.com.
Around 178,000 contracts traded in the November $11 strike put on Monday and another 205,000 contracts on Tuesday. A total of 427,000 puts and 20,000 calls changed hands this week through Wednesday, according to data from options analytics firm Trade Alert.
Put volume is now at its highest level since March 2011, Trade Alert President Henry Schwartz said.
As of Thursday morning, open interest in the November $11 puts accounted for 387,035 contracts after starting the week at around 5,600 contracts.
"One of the main fundamental drivers for Japanese equities has been the liquidity from the Bank of Japan," said Steve Place, a founder of options analytics firm investingwithoptions in Austin, Texas. "So a bullish volatility bet on EWJ may be looking to profit from either a reaffirmation of monetary policy or signs of tapering in their stimulus program."
"Since the put buys were apparently tied to stock, market participants are expecting a large move in the fund's shares between now and November," Place said.
EWJ options typically trade in massive size and it is difficult to determine whether the trades in question are hedging a portfolio or strictly a speculative bet, he said.
On Tuesday, for example, 115,000 November $11 puts traded for a premium of 16 cents per contract, and the activity appeared to be a repeat from Monday. These large blocks of puts were tied to the purchase of 4.2 million shares for $11.50.
The activity, like Monday's, suggests an outlook for increased volatility in the Japanese equity markets over the next six weeks, said WhatsTrading.com options strategist Frederic Ruffy.
Japan's Nikkei index is expected to close out this year with a gain of almost 50 percent, which would mark the stock market's biggest annual rise in more than four decades, according to the latest Reuters poll of forecasters. The outlook is slightly down from the consensus of three months ago.
The trim in the end-year forecast, which reflects a 9.4 percent gain from current levels, is mainly due to a slightly stronger yen, as well as worries that the U.S. government shutdown, which has been holding back global stock markets. could be prolonged.
"There's no telling who is behind these massive positions or what might be driving the activity," Interactive Brokers Group Block Trading desk said in a posting on the firm's website on Wednesday. "Though perhaps unrelated, it may be worth noting that Japan holds $1.14 trillion in U.S. government debt."
The Bank of Japan's deputy governor, Hiroshi Nakaso, said on Wednesday that global stocks could plunge and long-term interest rates rise, dealing a severe blow to the global economy, if U.S. politicians do not reach a deal to raise their debt ceiling by mid-month.
The warning followed similar comments by Japan's finance minister, Taro Aso, on Tuesday, signaling Tokyo's worries about the impact on its holdings of more than $1 trillion of U.S. Treasury bonds if the political deadlock is not resolved soon. .
As of July 31, China held $1.28 trillion in U.S. Treasury bonds and Japan held $1.14 trillion, Treasury Department data shows.
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