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Equity Derivatives Review
Long TOPIX calls - Short Nikkei calls
Derivative/Quant Strategy
Michiro NaitoAC
(81-3) 6736-1352
michiro.naito@jpmorgan.com
Yuichi Ito
(81-3) 6736-8616
yuichi.ito@jpmorgan.com
JPMorgan Securities Japan Co., Ltd.
See page 28 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Equity Derivative Sales
Steven Devine
(81-3) 67368722
steven.j.devine@chase.com
Tom Summersall
(81-3) 6736-8808
Tom.a.summersall@jpmorgan.com
Rie Takagi
(81-3) 6736-8721
rie.x.takagi@jpmorgan.com
Delta One Products/Equity
Finance
Peter Lindsey
(81-3) 6736-1963
peter.s.lindsey@jpmorgan.com
Hendrik Warntjes
(81-3) 6736-1358
hendrik.g.warntjes@jpmorgan.com
Hitoshi Kikuchi
(81-3)6736-9317
hitoshi.kikuchi@jpmorgan.com
Keishi Mitsuda
(81-3)6736-8740
keishi.x.mitsuda@jpmorgan.com
Highlights of the Week
• Market: In the week Barack Obama took office, the equity market suffered a
further loss, as more news of falling revenues, layoffs, and deteriorating
economy came flooding in. In the US, in the midst of disappointing earnings
reports by companies across sectors, giants such as Microsoft and Intel
announced massive job cuts, driving their share prices lower. In Japan, Chief
Economist Masaaki Kanno of J.P. Morgan cut Q4 2008 Japanese GDP to -9%
and Q1 2009 to -10% QoQ from -7% previously—the move entails -5% growth
in GDP for CY2009. Both Nikkei skew and term structure indicate that the
market is discounting a similar risk to the mid-December levels last year. With
a rapidly ailing economy and the earnings report season in full swing, we
believe that the market is headed lower (with rising volatility) before seeing a
light at the end of the tunnel.
• TOPIX Market Cap and GDP ratio: In our earlier report (“Japanese Equity
Derivatives 2009 Outlook,” Dec 1, 2008), we refer to the GDP-TOPIX Market
Cap ratio as a potential indicator of the market bottom. The ratio tends to
fluctuate between 0.5 and 1.1. We examine in this report what the current ratio
of 0.6 may imply for Japanese equities in the future.
• Earnings revisions and share price performance: The earnings reporting
season will begin in earnest next week (the week of Jan 26), but already a few
key companies, including Sony, have reported. If Sony, which has forecasted a
negative net profit for FY2008, is of any guidance, we may indeed be facing
volatile next two weeks. In this section, we look at forecast revisions and their
impact (if any) on the share prices.
• Long TOPIX calls – Short Nikkei calls: As the JPY broke through the 90 mark
once again, the currency factor is back on the front burner. One possible way to
leverage on the strong JPY may be to go long TOPIX calls and short Nikkei
calls. Historically, a strong JPY tends to generate TOPIX outperformance over
Nikkei, as seen in the NT Ratio. The situation we have in mind is similar to what
we saw between 2003 and 2005. Then the USDJPY moved from above 130 to
around 100. The equity market was generally strong, and TOPIX outperformed
Nikkei 225. By purchasing TOPIX calls and selling Nikkei calls of the same
maturity and strike, investors can attain exposure to a similar outperformance in
TOPIX. Should the equity market falter, on the other hand, investors can collect
the premium difference between the two options.
Note: Since options are a decaying asset, investors who purchase options risk
losing the option premium paid to purchase the option(s). Options are not
suitable for all investors.
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