ANALYSIS-Traders scour markets for protection amid tensions in Ukraine


Band Saikat Chatterjee and Danilo Masoni

LONDON, February 4 (Reuters)Baffled by saber-rattling between Russia and the West over Ukraine, traders are scouring global markets for investments that could provide them with protection against losses should the conflict escalate.

Any conflict risks triggering a rout of riskier investments such as global equities and a rush into so-called safe havens such as government bonds, gold and currencies like the US dollar and yen, leaving those who are exposed to equities with significant losses.

Typically, investors hedge against potential losses by buying assets that would pay off if the situation reverses, such as derivatives that could profit from a decline in stocks or commodities.

But with markets already battered by rising inflation, global growth concerns and monetary policy tightening, the cost of that protection has risen sharply in recent days, five traders said.

The European equivalent of the Wall Street Fear Gauge .V2TX — an index that calculates how much volatility investors expect on short-term stock behavior — is currently trading more than 50% above its 2021 average, an indication of how much increased demand drives up hedging costs.

Investors need to look deeper and further into the markets to find ideas that offer affordable protection.

In the interviews, traders and investors said they were considering a range of strategies, from derivative bets on how wildly French stocks would turn or German stocks falling to simply looking for assets that are currently out of favor but which would benefit if the markets got worse.

Two traders from major global banks, who requested anonymity because they were not authorized to speak to the press, said they recommend their clients watch the French stock market and place derivatives bets on volatility, a measure of the intensity of market fluctuations.

They expect the volatility of French equities to increase in the event of a dispute because it is one of the most liquid markets in Europe. One of the traders, who runs derivatives strategies at a major London bank, recommends his clients to buy call options on the French stock market .FCHI volatility, which would allow them to buy the underlying financial asset at a fixed price even as it rises in the event of a conflict.

To cover some of the cost of such a bet, the trader asks his clients to sell options on US stock market volatility, which he says is likely to be less impacted by an escalation in the conflict. However, taking such a two-sided bet would also reduce some of the profits in the event of a dispute.

Swiss bank UBS recommends buying call options on the yen or US dollar, according to a note released this week. Both currencies would likely strengthen as investors seek safe havens in case of conflict, making betting profitable.

Another suggestion from UBS is to buy put options on German stock indices, a bet that will pay off if the market falls. This is a possibility due to the reliance of German companies on Russian energy for production.

Some investors seem to embrace this idea. A put option on the March 2022 DAX index GDAX140000O2.EXwhich would turn profitable if the German index fell 10% below Wednesday’s closing levels, recorded record volumes on January 24 and again on Wednesday.


The upfront costs of protecting against what many still see as an unlikely event are leaving some investors reluctant to hedge, said Peter Ganry, head of strategy at Saxo Bank.

Investment firms like Amundi, for example, only assign a 10% probability of a full-fledged invasion.

Ganry recommends another type of bet: buying publicly traded companies like Virtu Financial VIRT.O and Flow Traders SA FLUX.ASwho profit when market volatility increases and the difference between the ask price and the bid price of a security, called the bid-ask spread, increases.

Some, like Sumit Kendurkar, a trader at market maker Optiver in Amsterdam, say there is also interest in buying upside calls on options on energy stocks with exposure to both natural gas and oil. UBS estimates that Russia and Ukraine together account for nearly 20% of the world’s gas and oil supplies.

Roberto Lottici, fund manager at Banca Ifigest in Milan, has a simple old-fashioned strategy of going gold, doubling the size of gold and silver investments to 6% of his fund, while reducing put options and other hedging instruments that become costly. .

“If the situation gets out of control,” Lottici said, “then it will be one of the very few assets that can offer protection.”

Russia Ukraine Chart

(Reporting by Saikat Chatterjee and Danilo Masoni in Milan; Editing by Paritosh Bansal and Elaine Hardcastle)

(([email protected]; +44-20-7542-1713; Reuters Messaging: [email protected]))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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