Corporates Step Up Option Writing

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Corporates Step Up Option Writing

Covered call option writing by Japanese corporates has rocketed over the past few weeks, according to market officials. One trader said his firm is receiving around 30 requests per day, compared with 10 inquiries a month or two ago. Another estimated trades had increased by around 30%. "People are starting to believe that the economy has bottomed out," said Jim Clark, head of equity trading at UBS Warburg in Tokyo.

The corporates either profit from earning premium on their range bound cross-share holdings or by unwinding the holdings at a higher level than the current market price. Clark said, "It's a smart trade." He continued that with the Nikkei 225 remaining over 11,500 in recent weeks, corporates believe the market is stabilizing and will likely stay range bound.

Typical options are three to six-months and 10-20% out-of-the-money. The average size is USD5-10 million.

"We're seeing a lot of interest," noted a trader at Credit Lyonnais in Tokyo, adding that activity has picked up over 30% in the last few weeks. He declined to elaborate on the overall size of the market.

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