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Equity Derivatives Review
Beta-based option strategy
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 33 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: The equity market faltered toward the week-end, as more worse-thanexpected
economic news hit the tape on both sides of the Pacific. In the US, the
Durable Goods Orders fell 2.6% MoM in December (consensus a 2% fall), the
New Home Sales fell to the lowest number on record, and the Continuing
Jobless Claims rose to the highest levels in history. In Japan, the Industrial
Production fell 9.6% MoM in December, recording the two consecutive months
of worst decline in history. Despite the barrage of disappointing economic
news, fear of future economic conditions continues on the declining trend, as
seen in the VIX, Nikkei skew, and Nikkei term structure. We believe this is
somewhat alarming, however, as the gap between the CDS spread and Nikkei
implied volatility has once again widened in recent days.
?Expiring convertibles: As the fiscal year-end approaches in Japan, once again,
we pay our semi-annual attention to Japanese convertible bonds. Twenty-one
convertibles (excluding third-party allocations) will expire between Feb 5 and
Mar 31 (dates inclusive). As most of them are deep out-of-the-money, the
implication we would like to convey is not the delta-hedge effect. Instead, we
would like to point out that some of the companies may need to raise capital for
the upcoming redemption.
?Earnings are in: Over three hundred Japanese companies have reported their
FYQ3 or FYQ4 (depending on fiscal-year-end) earnings numbers thus far
(excluding Jan 30). As the reporting season continues well into February, we
present the results in this publication (only TSE1-listed companies are covered).
?Beta-based option strategy: Historically, a stock抯 beta has a close correlation
with its volatility. This stands to reason, as beta is a measure of deviation from a
benchmark, while volatility is a measure of deviation from a stock抯 average
performance. Thus, in general, the higher the beta, the higher the volatility. In
this section, we try to exploit a discrepancy between stock抯 beta and volatility.
It is well-known that stocks exhibit different betas when it is going up from
when it is going down, while historic volatility (on which often implied
volatility is based) generally does not take into account this difference (skew
comes from entirely separate considerations). We recommend options based
upon our analysis.
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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