Russell’s Roundup – The Weekend in Review

Barron’s:

This weekend’s edition contains a cover story on taking advantage of the weakness in Japanese stocks as a buying opportunity. The article includes a list of equities available for trading the US along with a list of Japanese related exchange traded funds.

Probably the most liquid ETF on the list is the iShares Japan Index (EWJ). Share volume for the EWJ was over ten million shares a day before the natural disasters that struck Japan on March 11. Since then the daily volume has surged to over a hundred million shares each day. Liquidity is not a problem with this ETF.

Using Friday’s closing prices, if you feel now is the time to take a long position on Japan the EWJ closed at 10.37. However, if you feel a recovery for Japanese stocks will occur in the next two years there is a viable alternative in the option markets. This alternative comes in the form of LEAPS.

There are LEAPS Calls with expiration on January 18, 2013. The closing prices for those contracts appear in the table below.

 

Contract

Last

Bid

Ask

EWJ Jan 2013 5 Call

5.30

5.25

5.60

EWJ Jan 2013 6 Call

4.50

4.45

4.70

EWJ Jan 2013 7 Call

3.65

3.65

3.90

EWJ Jan 2013 8 Call

2.95

2.85

3.15

EWJ Jan 2013 9 Call

2.25

2.11

2.43

EWJ Jan 2013 10 Call

1.80

1.69

1.81

EWJ Jan 2013 11 Call

1.20

1.21

1.34

EWJ Jan 2013 12 Call

0.95

0.76

0.99

EWJ Jan 2013 13 Call

0.64

0.64

0.66

EWJ Jan 2013 14 Call

0.41

0.30

0.47

EWJ Jan 2013 15 Call

0.25

0.23

0.32

 

The EWJ was trading around 11.50 before the crisis hit. To demonstrate how LEAPS would work if the EWJ is trading at 11.50 in January 2013 consider the EWJ Jan 2013 7 Call trading at 3.90 as an alternative to the EWJ fund at 10.37. Based on a price assumption of 11.50 in two years the following price returns could be realized –

 

 

Entry

Exit

Profit

% Profit

Long EWJ ETF

10.37

11.50

1.13

10.90%

Long EWJ Jan ’13 7 Call

3.90

4.50

0.60

15.38%

 

As with all LEAPS purchases there is no entitlement to the dividend paid by the EWJ, estimated at 1% per year right now, nor are there shareholder rights such as voting proxies.

 

Option Action on CNBC:

Discussed Research in Motion (RIMM) going into earnings on Thursday – the traders noted that the options are implying a move of 7% (non-directional) out of the stock into earnings. The stock normally moves about 9.5% post earnings. They suggested a bearish spread to benefit from any weakness that may come from the report.

The guys also talked about Red Hat (RHT) stock into the company report this week with a bearish bias. The recommendation was to initiate a bearish spread into RHT earnings as well.