The "Anti-Widowmaker" Trade: Get Paid To Wait For The Japanese House Of Card To Collapse

Tyler Durden's picture

So many traders think the key to investment riches lies in buying at the bottom or selling at the top: Such a fine but misguided notion. The cold reality is that unless one has (illegal) inside information, you will only transact at these locations by pure happenstance. The best managers can enter a position in a zip code near the bottom or top, but not precisely. This is why the most successful investors recognize that sizing is the critical concept. A position that is too small will not justify the effort involved in discovering a valuable idea. Even worse, a position that is too large may force a “stop out” before a brilliant theme reaches its denouement. This Commentary reveals a way to gain exposure to a popular idea, but in a manner that will allow one to hang on for the long ride it may take for full realization.


The lesson here is that being “right” is just not good enough to claim investment victory, one must find a way maintain exposure to the investment premise long enough to earn a profit. So let’s turn our focus to what may surely be the next “big investment theme” that has so far only succeeded in gaining the moniker of “The Widow-Maker”. If you guessed wagering upon when the Helicopter Economy of Japan will finally lose altitude, you would be correct.


In a tree saving effort, let me boil my argument down to this: “It is never different this time.”

- Harley Bassman, Credit Suisse      

That Japan's economy is doomed (as best seen in this chart), as are its government bonds, is unquestionable. There is simply no way the country, faced with an inescapable demographic collapse... 

...can crawl its back to viability without imploding in an eventual deflationary singularity, from which, however, courtesy of the BOJ's epic printathon, it may eventually inflate away its debt, but not before crucifying its currency, and the living standards of its population. In other words, there is no realistic escape.

This is not news. The problem is that for many - especially the Japanese experts - this has not been news for years and years, yet anyone and everyone who has so far bet on the collapse of the Japanese house of cards, has lost money if not gone bankrupt due to the negative carry or the time decay of any short options. Hence the name: the "widow-maker" trade.

There may, however, be a loophole for all those who, correctly, know that the end of the line for Japan is just a matter of time. The trade in question is described by the "convexity maven" - Credit Suisse's Harley Bassman:

The Trade

Taking a “short position” in either Japanese interest rates or their currency is a fundamentally sound idea; however it may take three to seven years for the “Macro-profits” to be fully realized. Over that time, a short position will demand a cost, either in the terms of the negative carry of a spot position or the time decay of a short-dated option. Additionally, since it is unlikely you will enter the trade at the extreme, there could be some mark-to-market vibrations that may breach your risk limits.

To the rescue is the strange circumstance of a widening USD vs. JPY Rate differential in conjunction with a flattening Volatility Term Surface. Below is a table of mid-market values for Par Strike USD call // JPY put options with expiries from one-year to ten-years. The critical observation is that a five-year option costs more than a ten-year option; thus the weird dynamic of owning an option with (effectively) positive “theta”: You are paid to own an option !

This is neither financial “magic” nor an “option special”; these are all plain vanilla options than can be priced using Bloomberg’s OVDV screen. Rather, it is merely the interesting mathematical paradox between the Rate process which is Linear and the Time process which is Logarithmic.

In a nutshell, net interest income is linear to time so two years of coupon payments are twice the size as a single year’s value. In contrast, an option’s price increases with the square root of time, so a two-year option is only 1.4 times greater in price than a one-year option.

The easy execution of this idea is just to buy a ten-year call option and put it away for five years:

Strike = 100; Price ~~ Customer pays 7.375%
Strike = 110; Price ~~ Customer pays 5.375%
Strike = 120; Price ~~ Customer pays 4.125%

The more interesting trade might be to execute a five-year vs. ten-year calendar:

Sell five-year vs. Buy ten-year, Strikes = 100; Client receives 0.50%
Sell five-year vs. Buy ten-year, Strikes = 110; Client pays 0.750%
Sell five-year vs. Buy ten-year, Strikes = 120; Client pays 1.375%


1) The maximum loss for an out-right purchase is limited to the fee paid;
2) The “net” option decay is positive for longer-dated options;
3) Provides the time required to capture the “event risk” of the premise;
4) JPY rates should likely increase at a faster pace than USD rates when Japan finally needs to externally fund itself. Thus one owns a “rates kicker” since the steep negative slope of the forward currency spread will collapse (and may ultimately invert). This would greatly benefit the calendar spread execution.

The lesson from so many of the great Macro Investments Themes is that it sometimes takes the “fullness of time” to realize the largest profits. Unfortunately, the current environment has less patience to tolerate investment costs, as such a “Positive Carry” long option position should be quite interesting.

The Japanese financial situation will normalize at some point; being “paid to wait” for the first five years solves the thorny problem of trying to time that date.

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chinoslims's picture

"You should see what I am packing"


Midas's picture

Is it wrong that I pronounced it "roophole"?

AldousHuxley's picture

japanese scientists working on robots to replace japanese workers

american politicians working on amnesty for illegals to replace american workers



Oracle of Kypseli's picture

There is risk everywhere. What if.. The Japanese gov. in a surprize move allows wide open immigration? You may have to wait forever.

kaiserhoff's picture

For the readers who understand this trade, don't do it.

Calendar spreads have been acting funky for the last couple of years.  Backwardation has even shown up in gold, of all places, and just because a trade is ass backwards doesn't mean it can't go more so.  Under free markets this is a slam dunk, not now.

For the arbs who might still be interested consider:

  Early exercise

  The madness in Japanese interest rates which feed directly into option prices

  Counter party risk

Don't get Corzined.  Enough said.

Midas's picture

If there is one thing I learned from Walter Sobchak it is to keep the plan simple.  When it gets too complicated it gets *ucked up.  This trade requires too much trust.

putaipan's picture

la danh dah danh da danh, da danh da danh, la dah da danh dah danh da ....

U4 eee aaa's picture

oooh, I know that song!

Oldwood's picture

When I become president I'm finally going to let my ass get this wide! The but stops here.

putaipan's picture

you should see what i'm packing .....

mess nonster's picture

"Drop kick me, Jesus, through the goalposts of life!"

kaiserhoff's picture

"I was Roped and Throwed by Jesus, in the Holy Ghost Corral."

max2205's picture

Buy IWM and sell when you see smoke

LMLP's picture

I seen thick plumes of it for 3 years.... madness prevails

novanglus's picture

Say, we act if we want to,
and we know nobody will,
and you can act real rude and totally remove
in fact you act like an imbicile

Do the safety dance. 

Or is she doing her impression of John McCain raising his arms?


U4 eee aaa's picture

....then he said the guillotine blade should be this wide

donpaulo's picture

The warning signs are readily apparent, the question is how long can the Japanese continue to roll things out ?

My guess is they can keep things from falling apart long enough just long enough so that it will be trumped by other news such as an unpegging of the RMB or an IMF global bailout

150Yen to the USD is baked into the cake IMO

NoDebt's picture

Don, I'm glad you're sure.  I'll take your word for it.  I'm reassured the USD won't be plummeting at the same time or this trade might not work out so well.


Oldwood's picture

Maybe I give them too much credit. It just seems this is all going along too well to be an accident. I don't know exactly how or to where, but I think we are being herded. Anything that looks like an escape from the disaster that most of us see coming has to be apparent to the "planners" well in advance to everyone else. I think we are trapped like rats. AS some have said, the best plan may be to anticipate the absolutely most impossible outcome imaginable as that may well be the plan.

disabledvet's picture

"throw darts at the dart board." not sustainable...fer sure. but real? you bet. Japan and Europe both have serious problems with demographics...yet one has a currency in "deep debasement" and the other has the opposite. one would be well advised to be confused. not saying the piece won't be right...but why should i invest in something i or most of the rest of the planet simply doesn't understand? because "i have high risk tolerance"? for what exactly? safer to buy solar city stock in my view.

screw face's picture

China is flipping Fed. paper..what do think is going to happen

nodhannum's picture

I think it would be wise to not overthink this. Sometimes a cigar is just a cigar!

OpenThePodBayDoorHAL's picture

Ding ding ding we have a winner. That's the really fuked part about this whole situation. It's all relative.

Mine Is Bigger's picture

I wonder if it is so smart to bet which one sinks deeper.  It seems to make more sense to invest in things that will likely appreciate against both the dollar and the yen.

lewy14's picture

The dollar will die when the US Gov stops accepting it as payment for taxes owed.

Till then, it's just sick, not dead.

The end game was written by Diocletian close to two millenia ago. But we're not there yet.

Till then, accumulation of bits with data type "USD" will be worth something to you.

kaa1016's picture

The problem with these predictions is the fact that the other central banks are well aware of Japan's problems. There is no way on earth that the Fed or the ECB will stand by and watch as Japan's currency collapses because if that happens, their currencies are toast as well. Never bet against the house when at any given moment they can change the rules and destroy anyone for the sake of national security.

lewy14's picture


But there is another possibility; a different "template".

Perhaps the central banks need one OEDC country to go completely tits up, so that the "unthinkable"* becomes "thinkable" becomes "mainstream policy" (in about 2 or 3 news cycles.)

See, e.g., the Greek debt restructuring, or the Cypress bail-ins.

Every "template" needs an exemplar.

* currently "unthinkable" possibilities include:

- NIRP to create relative term structure pressure on cross rates where the currencies are already at the zero bound.

- Some kind of coordinated forward guidance (where central banks commit to making their policies contingent on events in other countries). We saw some ad-hoc coordination with the Fed currency swaps etc; they could try to stave off runs by some kind of mutual defense pledges. This is unthinkable today because "Hey! Sovereignty!", but that will last about 10 minutes when a big currency like the yen goes all Weimar.

- Mutual sharing of tax info; making explicit the already implicit encumberance of all private financial assets in the system (in lieu of outright confiscation, this will seem lenient and liberal).

Nota bene the yen has no natural holders who are not themselves Japanese; if you are Chinese or Brazillian or Arab or Russian you can think of holding some GBP/CHF/EUR/USD because you can buy property and be fabulous in London/Davos/Tuscany/LA etc... there is no possibility of being fabulous in Hokkaido or Osaka if you are not Japanese. And the real property of Japan is its ultimate wealth; the implicit backing of its currency - not this quarters export numbers, or next quarters. This is not a moral judgement; the Japanese are well within their rights to run their country as they see fit; but policies have consequences.

screw face's picture

+1 kaa...remember the law of 'Barking Butterflies'

YHC-FTSE's picture

Exactly.  The trade is based on the premise that one fucked up country's currency will diverge in rates from another equally fucked up country's currency in the future. The premise that these incestuous,  interdependent central banks will allow one to collapse while the rest remain unscathed is absurd. Kyle Bass did much the same with his jump risk options, and while the strategy to carry the trade then to close at the most opportune and profitable time is sound, betting on the timeline of inevitability and counterparty solvency is a huge risk in options. 

There's nothing "weird" about 1-5yr options being more expensive than 10yr options. Priced according to risk, so those who are selling sees more immediate risk in Japan than later. 

It's not wrong,  but 3 things I do not like about this article are, 1) It is not an "investment" opportunity,  it is a risk when it is possible to  lose more than the principle sum invested 2) Payment and comparison are in USD. I'm not as confident in the viability of the reserve currency as the author.  3) Betting on the misfortune of other people,  even if it is the Japanese and even if it is inevitable,  leaves a bad taste in my mouth.  

kaiserhoff's picture

Solid work, YHC.

This pricing is not necessarily wrong.  IF Japan makes it through the next two years, the economy might somehow improve, at least relative to other players.  Big IF.

The trade, as shown, is just ridiculous.  Five and ten year options are illiquid and any damn fool thing might print on the screen.  Try getting out of it when you need to.

The real trap here, is that this is presented as a risk free trade.   IT IS NOT.  If it goes in the money you face an early exercise which means the short side is marked to market every day.  Long you still only have an option.  Face ripped off.

Also five and ten year options in a country in crisis will not track each other in any predictable way.

What is not understood about derivatives will bite you in the ass, every time.

LMLP's picture

mmmm more likely their trading desk just received a big chunk of longer dated vol through some "structured note"...and this is their attempt to "re-cycle" it through their customer base.....

(aka dumping their vol on your retail ass)...

vol's cheap...... really it's cheap...!

you should buy some!

phew, sweet thanks!





q99x2's picture

Japan goes toast, what good's money?

AGuy's picture

Timing the Collapse of the Yen is not feasible. People have been beting on the Japan collapse over a decade. I think there are better things to do with your money than play a waiting game that will probably stretch out for a few years. Also consider that when Japan does finally face a real currency crisis, the first thing they will do is dump US dollars and treasuries. The US dollar is likely to collaspe nearly at the same time as the Yen.

mkkby's picture

NO fucking way... they will buy USD.  Were you ASLEEP during the Greece/Cyprus/Europe bond events?  Everyone jumps to USD during a crisis. 

US bonds and USD will go up -- temporarily.  Once Japan and the EU countries implode and reset, they will become the safe haven.  Then, and only then, is the USD fucked.  The safe haven trade will have somewhere else to go.

Unless China or someone else comes out with a gold-backed currency.  The the USD could crash "out of order".

AGuy's picture

"NO fucking way... they will buy USD"

1. Japan owns close to $1 Trillion in Treasuries. When Japan implodes so will its currency, everyone will dump the yen. In order to slow the decent, the BoJ will start seilling its Treasuries.

2. The Federal Reserve will also do its magic to try to stablize Japan with currency swaps, as the did in in the EU during the 2008 crisis. Japan after all is even more important to the US than the EU is.

3. We have Yellen as the Next Fed Clown. The dollar is already doomed. By the time a crisis begins in Japan, the dollar will probably be knocking on death's door. Its likely investors will have already begun turning away from Dollars as a safe haven.


"Unless China or someone else comes out with a gold-backed currency"

Or the world distances itself from the USD as the worlds reserve currency. We see more and more nations setting up agreements to exchange other currencies than the dollar. I don't see this tread reversing, but I do see it accelerating.

2014 is probably going to be a critical year for the US and the dollar. First we have Yellen taking over. Second the US economy is probably going to get much worse because of Obamacare as premiums go up 50% to 300% and deductable rise to $3K for the middle class. This means significant higher medical costs for consumers. This will also effect the healthcare industry as americans are force to cut back on prescriptions and medical services (due to the $3K deductable). The US (EPA) is forcing the closure of 15 GW of power plants wihich wiill increase power costs for consumers and industries. We will see more factories close and ship jobs overseas because of the rising power costs.

If I am correct about 2014, then I think it dollar will begin its long term slide to zero. FWIW: My goal to eliminate my dollar exposure by the end of 2015, except for what I need to cover living expenses (I live in the USA)




johnmack's picture

so other than gold and silver what does one invest in, if the japanese currency collapse wont people be running to the USD and EURO for safe haven?


johnmack's picture

so other than gold and silver what does one invest in, if the japanese currency collapse wont people be running to the USD and EURO for safe haven?


Nobody For President's picture

And a black swan like (say) stumbling into a war with China over the little islands and the energy in the sea beds around them?

Or a Fukishima meltdown?

Or another humungous earthquake?


It probably ain't gonna be a matter of demographics or interest rates or printing/not printing.

Divine wind, bitchez.


Lin S's picture

Japan is fucked.

(I've been wanting to shout that all day)


Hongcha's picture

Study grey markets, study black markets, and underground markets.  Be prepared and a little flexible.  Bai dao, hei dao as the Chinese say ("white ways, black ways").  

The middle-class caucasian American publick is woefully naive and the sloooow wind-down and pillage that The Bernank et al. are orchestrating is simply being understood as "a bad economy" and then the analysis terminates in their already overtaxed brains.

The other races within the U.S. already game the system for more than you would believe.  I'm not ganging up here so I hope no one is getting their back up if I tell it like it is.  The white republick is the one that trusts the authorities and believes in the system and ponies up.  Fugiddabout it, once and for all.  Your govt. is a malignancy and if you want to keep what's yours start compromising what you give them.

If the average white middle-aged, middle-class guy can choke down the fact that his govt. is a malignancy and the natural enemy to his liberty, he has a chance.  It's the red pill/blue pill analogy.

WarPony's picture

I'll take umbrage for $1000 Alex.  And, the answer is, "Blood Games."

What the American white guy shut down in '96 causing the puppet master to tweak the machine and go for financial fraud as the Republic's war de jure?

Correct. Never underestimate the ability of this sleeping giant. Also correct, sprecken ze Deutsche, or paroli Esperanton.

kurtosis's picture

Those are european options (exercised only on expiry date)
If you buy the 10 year and sell the 5 years and in 5 years the market is at 80 or even 90, you will be DEAD !!
(i.e. you will loose marked to market way more on the short than on the long and at expiry of the 5 year option, you will have to settle at a huge loss)

rayban's picture

Correct: with European options you cannot perfectly arbitrage the forwrd curve. The problems, however, arise if JPY collapses (i.e. if the $ goes to 200 or higher) earlier than the expiry date on the short, not vice versa. Hence if you are right too early you would have to fund the payoff of the short USD call until the maturity of your long position or sell your long to cover it if, by then, there is a market for a 50% in-the-money call incorporating a huge credit exposure. Better take the long call outright and forget about the short component of the strategy, maybe with a reduced size.

U4 eee aaa's picture

I have shorts that will trigger on the nasdaq because if Japan goes down, it will probably take the credit market and thus the US with it

Winston Churchill's picture

If  that happens ,do you truly believe the counterparties will still exist without

the gubment changing the rule to not pay you ?