Asahi Mutual Life Insurance, one of Japan's largest insurers, plans this year to significantly increase its JPY100 billion (USD872 million) equity derivatives book in order to reduce by more than one third its JPY2 trillion equity holdings over the next couple of years. The insurer expects the Nikkei-225 to trade in a narrow range around 14,000 this year, and so believes it can make money by selling calls struck at the top end of the range and selling puts struck at the lower end, while selling stocks in the cash markets, said Yasuhiko Sato, manager, equity investments department in Tokyo.
Most single-stock puts and calls will likely be 10% out-of-the-money, while index options will be 1-2% out of the money, strategies it has followed for some time, Sato said. It typically buys options with a one- to three-month maturity, he noted, but could sell options with maturities out to six or nine months if it thought the market had reached a peak. He declined to estimate how narrow the range of movement could be or by how much it expects to increase its derivatives book.
Asahi expects Japan's equity markets to settle in a range because of predictions that corporate earnings will grow by less than 10%. This would not be enough to push the stock markets notably higher, but also would not trigger a bear market, Sato explained. Also, while an anticipated increase in business spending will help the economy, this could be countered by a reduction in government spending and fairly stagnant consumer spending, he said.
Asahi started using single stock equity options for the first time last year (DW, 6/12) and also uses listed futures and options based on the Nikkei and Topix indexes. It also uses interest-rate and currency forwards, he said, declining to divulge the size of its total derivatives book.
