Morgan Stanley's Tips on Japanese Options Strategies

Has Japan become a museum piece? Is the Japanese economic experience to serve only as an historical lesson to others, as it slips off the international investors' agenda? These were some of the questions asked at Macro Vision, Morgan Stanley’s annual conference in New York on the global macroeconomic outlook, as reported by Robert Alan Feldman in Morgan Stanley's Global Economic Forum.

At the conference, a similarity was drawn between Japan's financial meltdown and the current U.S. subprime debacle: "imprudent borrowers, imprudent lenders, [inadequate disclosure] and unprepared regulators." In contrast, though, the strengths in the U.S. - the rapid response of institutions, the deeper markets, and regulator scrutiny - have led many investors to conclude that the U.S. will not repeat the lost decade of recovery that Japan has experienced.

However, as Feldman continues, this will not mean that foreign investors are likely to trigger any surge in Japanese equities:

This attitude stems not only from adverse macroeconomic developments in Japan (such as consumer sentiment collapse), but also from the atmosphere in the U.S. and the global economy. So long as subprime problems, credit problems, the global slowdown and high energy/agricultural price problems remain, it will be hard to convince investment committees in the US to raise weightings in Japan.

So how exactly should the savvy investor treat Japan? Feldman describes options strategies, tailored separately for the pessimist (who wouldn't want to miss the opportunity should Japan take a turn for the better) and the optimist (who sees a limit on the downside as valuations are already low). For the pessimist:

"... one might want to buy both calls and puts, in amounts and with strike prices that suit one’s portfolio and opinions. Such a position would cost money to maintain, but would allow one to sleep at night while concentrating on other markets.

And for the optimist:

"... an investor may write puts and use the premiums to buy calls, in amounts and with strike prices that suit one’s portfolio and opinions. Such a position would be costless in terms of money, but not sleep.