For months now, those trying to hedge USD/JPY were covering the risk of a setback in spot, paying little attention to the topside, but that is starting to change.
Lack of demand for topside protection made sense until now, with USD/JPY capped by resistance in the low-mid 109s since falling below in late May.
Weeks of range trading in spot have taken their toll on implied vols, which are now trading close to record lows nL2N27G07M.
The implied vol premium for JPY calls over puts (USD/JPY downside) has fallen to its lowest this year, but it's still 0.75, which means a similar implied vol discount for those choosing to buy JPY puts (USD/JPY topside).
While more investors are now taking on topside protection, that doesn't necessarily mean USD/JPY will trade much higher.
They are just taking advantage of the record low vols and that topside discount at perceived value levels in the event that it does.
On the other hand, those still worried about a USD/JPY setback can also benefit from mega low vols and cheaper JPY calls.