A small group of traders is placing extreme currency options bets that aim to sidestep any volatility from the upcoming US jobs data, with the yen at the centre of the strategy.

Nomura Holdings Inc, Japan’s largest broker, is seeing bets that will profit if the yen soars during a six-to 12-month window, said Ruchir Sharma, global head of foreign exchange (forex) option trading. The longer time frame is notable in the US$300 billion-plus currency options market, where a big chunk of trades focus on the next three months or less. 

“This has been led by a few select funds that have been buying yen calls with significantly out-of-the-money strikes over a six-month to one-year” time horizon, Sharma said. The trades are set up to profit from a meaningful strengthening of the yen if the payrolls data is weak, he said.

The appeal of longer-term trades is rising as a succession of risk events awaits investors on Friday. The US jobs report will provide fresh clues on the Fed’s policy path - then not long after, New York Fed president John Williams is due to speak. Fed governor Christopher Waller makes remarks two hours later. 

Taken together, those events have the potential to roil assets from the dollar to Treasuries, stocks and options.

Waller will be the last “official guidance,” so for example, if payrolls is strong but Waller hints at a bigger-than-expected half-point rate cut “it will be a proper chop fest,” said Predee Anuvatnujotikul of hedge fund SPX Capital Management SG Pte.

That prospect is encouraging another trading strategy: do nothing. A number of hedge funds have decided to sit on the sidelines until it’s done. Foreign exchange option trading volumes on Depository Trust and Clearing Corp this week have been a fraction of recent sizes, with Wednesday’s about 39% below its previous five-day average. 

It’s simply too difficult to have “strong conviction” ahead of Friday, SPX Capital’s Anuvatnujotikul said.

If the employment report is weaker than economists forecast, the dollar is likely to come under pressure as traders ramp up wagers on half-point Fed rate cuts on Sept 18. Conversely, a stronger print may propel the greenback higher. The risk is looking outsized even for strategies that benefit under either outcome by buying both dollar call and put options.

“Playing from a pure long gamma position will also be tough as you’d have to be prepared to trade the gamma like a ninja,” Anuvatnujotikul said, referring to fast-money funds trying to capture the highs and lows in any dollar swings as they hedge their option positions. 

Pennsylvania-based hedge fund Mount Lucas Management is simply practicing caution all around. 

“Discretionarily, we are conserving firepower to see how things shake out,” said David Aspell, chief investment officer. “We have some slow-grind-higher dollar-yen option structures - nothing to write home about, though, in size.”

  - Bloomberg