Japanese stock markets have risen, with the Nikkei index reaching its highest level since July 17, 2024. This increase in Japanese stocks is tied to a recent trade agreement. Even with the market changes, the USD/JPY exchange rate has remained steady since the US market closed.

Improved Market Sentiment

The rise in the Nikkei shows better market sentiment. Investors are reacting positively to recent news, pushing the index to new heights. With the market’s boost, Sheridan suggests selling volatility instead of simply buying into the rally. The Nikkei Volatility Index is currently low, trading below 20, which shows little market fear. This situation makes it more appealing to use strategies like selling puts or covered calls on index-tracking ETFs to earn premiums. This rally is largely influenced by currency weakness. The USD/JPY exchange rate is consistently above 155. This directly benefits Japan’s major exporters since it increases their overseas profits when exchanged for yen. Therefore, we should focus on export-driven sectors, such as automobiles and electronics, which benefit most from this trend. We plan to sell out-of-the-money put options on the Nikkei 225 index in the coming weeks. This strategy allows us to take advantage of the positive market momentum and the low implied volatility. We hope these options will lose value and expire worthless as the index stays above our chosen strike prices.

Potential Risks and Historical Context

The primary risk for this strategy is a sudden change in policy or intervention by the Bank of Japan to strengthen the yen. Historically, unexpected government actions have caused sharp, multi-day drops in the stock market. We will closely watch currency futures and use disciplined stop-losses on our short-option positions. Unlike the asset bubble of the late 1980s, today’s market strength is supported by significant corporate governance reforms and record-high earnings. Foreign investors have also been a key factor, investing over ¥6 trillion in Japanese stocks in the first quarter of this year alone. This continued international interest indicates that the market’s support is stronger than in past rallies. Create your live VT Markets account and start trading now.

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