New Trade $RSX: A Crimea Idea

by Dan March 14, 2014 12:31 pm • Commentary

The situation in Ukraine is likely to get some clarity after Sunday’s referendum vote by the voters of Crimea as to whether they want to be annexed by Russia.  Russian equities have been the hardest hit risk asset since Ukrainian tensions heated up following the conclusion of the Olympics in late February.  RSX (the Market Vectors Russia etf) is down about 12% in March alone, and down around 25% so far in 2014.

While it’s tough to predict how this will shake out, my Fast Money friend Tim Seymour, who is the proprietor of, a website dedicated to financial analysis and trading emerging markets, had a very interesting post today that I agree with, excerpts here:

The market is all that matters on some level for us and it has spoken emphatically.  The move to distressed valuations is extreme value even for Russia.  The market sliced through the Aug/Sept’10 smackdown and that is telling.

At 0.53X P/B for the ENTIRE market, this is cheap even by Russia standards.

Western sanctions will not affect the Russian economic trajectory.  The EU can’t place Iran style sanctions on Russia and we already see Germany is caught in a hard place geopolitically.

Tim and I have been discussing the set up for Russian equities over the last week and we both agreed that it could be time to dip toes in water. Tim has been nibbling at the RSX:

I expect we could get a washout even next week if events deteriorate but more likely it’s a case of right now play the oversold carefully, measure your risk and expect a bounce followed by a drift.

I don’t disagree with his view, and early next week there could be some fireworks.  But for those looking for oversold situations and think that Russian equities could act like a coiled spring sometime soon with the slightest bit of a good news, we are inclined to express this view with define risk with an options structure.

The one year chart of the RSX shows the massive technical breakdown this week below $24, which should now serve as healthy resistance on a bounce:

RSX 1yr chart from Bloomberg
RSX 1yr chart from Bloomberg

The five year chart below shows the break below the Aug/Sept 2010 period that Tim referenced.  The breakdown of that support likely implies MASSIVE long term resistance on any bounce up to $25 without some overwhelmingly bullish resolution:

RSX 5 year chart from Bloomberg
RSX 5 year chart from Bloomberg

Lastly, implied volatility of the options on the RSX make outright premium purchases very expensive, approaching 3 year highs, but still well below the vol spikes in 2010 and 2011:

RSX 4 year chart of 30 day at the money implied vol from Bloomberg
RSX 4 year chart of 30 day at the money implied vol from Bloomberg

With the Crimea vote on Sunday, our expectation is that Crimea votes to join Russia.  The real uncertainty is with regards to how the Western nations (particularly the U.S. and Germany) react to Russia’s annexation of Crimea.  The more severe the reaction, the more likely that investors are going to panic. But there are a lot of reasons that the West will be careful about sanctions being too draconian.

The West has powerful tools at its disposal for use against Russia, including potentially levying sanctions against certain Russian banks and companies. That would be a huge, and dangerous, gamble. Russia has promised to retaliate for any Western sanctions, perhaps by seizing the assets of American firms operating in Russia. The bigger risk, though, is that Russia could do everything in its power to prevent the United States and its allies from using the global financial system to combat other foes.

Russia has been instrumental in isolating North Korea and Iran by refusing to veto hard-hitting United Nations Security Council sanctions resolutions. Those measures have been credited with hobbling the Iranian economy and bringing Iranian negotiators back to the table to talk about dismantling the country’s nuclear program. American sanctions against Moscow could persuade Russian strongman Vladimir Putin to retaliate by ignoring current sanctions, expanding his commercial dealings with Tehran, and vetoing any new effort to impose new sanctions if the current nuclear talks end without a deal.  

A lot of bad news is priced in, so Russian equities could be setting up for a sell the rumor / buy the news type of situation.  No guarantee of course, but this structure offers a defined risk way to play it:

TRADE: RSX ($21.55 ) Bought April 22 calls for 1.00

Break-Even on April Expiration:

Profits:  above 23.00 have unlimited profits.

Losses: btwn 22 and 23.00 lose up to 1.00, below 22 lose entire 1.00

Rationale:  The price of options is very high as we noted above, the problem though for those looking to make directional bets is that short premium trades don’t look that attractive for those looking for a quick bounce. We are also of the mindset that if Russia doesn’t bounce soon then it could crash.  We will look to sell these calls for a double on a move back to resistance.