COMMENT-Hedging the USD/JPY short gamma volatility surge

Well touted short topside gamma positioning could fuel USD/JPY demand and volatility if 152.00-153.00 FX option barriers are breached, but there are low cost options that can hedge that risk.

Gamma exposure is greater in near term expiry FX options with strikes close to the spot rate. The USD/JPY options market is long gamma below 152.00 and that's impacting realised volatility and combining with impending Easter holiday premium decay concerns to force related implied volatility to long term lows. However, that also reduces the premium and makes buying options more attractive.

If USD/JPY breaks 152.00-153.00 and forces short gamma covering, market makers will be forced to hedge exposure by chasing spot and buying short dated expiry options, boosting implied volatility/premium. USD/JPY FX options with near-date expiries and strikes within the short gamma zone would benefit from a break above 152.00, but owners must accept the risk of losing some, or all, of the initial premium, if that break higher fails to materialise.

With USD/JPY at 151.35, a 2-week expiry 154.00 JPY put/USD call with an implied volatility of 7.0 as an example, has a premium of just 7 JPY pips.

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