FX traders can use a simple option strategy to cover a possible dollar drop against the yen if investor sentiment against global stocks and bonds becomes more marked.
In times of uncertainty, with risk aversion on the rise, funds usually flow into the safe-haven yen.
A USD/JPY cloud twist on March 4 under 104.00 warns of bearish moves in coming sessions.
Cloud twists usually act as a magnet to FX traders.
EUR/JPY is also at risk of slumping as the 30-day correlation with USD/JPY is increasing and is close to the +0.5 threshold.
So those who want to insure against a USD/JPY drop could buy a two-week 105.40 USD put option at a cost of 24 pips, priced with spot at 105.40.
Profit potential is unlimited if spot is below the 105.16 break-even point at the March 21 expiry.
Losses are limited to the 24 pips premium paid.
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