Analysis: Traders scan the markets for protection amid tensions in Ukraine

A man looks at stock market monitors in Taipei October 8, 2008. REUTERS/Nicky Loh (TAIWAN)/File Photo

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

Any conflicts could trigger riskier assets like global equities and a run on so-called safe havens like government bonds, gold and currencies like the US dollar and yen, causing large losses for those with equity exposures.

Typically, investors hedge against potential losses by buying assets that would pay off if the situation were to reverse, such as: B. Derivatives that could benefit from a fall in equities or commodities.

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But with markets already reeling amid rising inflation, worries about global growth and tighter monetary policy, the cost of that protection has risen sharply in recent days, according to five traders.

The European equivalent of Wall Street’s fear meter (.V2TX) — an index that calculates how volatile investors expect stocks to behave near-term — is currently trading more than 50% above its 2021 average, indicating how increased demand is driving down the cost of hedging up drives up.

Investors need to look deeper and wider across the markets to look for ideas that offer affordable protection.

In interviews, traders and investors said they look at a range of strategies, from derivative bets on how wildly French stocks will swing or how much German stocks will fall, to simply finding assets that aren’t popular right now but are benefiting would get worse if the markets went down.

Two traders at major global banks, who asked not to be known because they were not authorized to speak to the press, said they would advise clients to look at the French stock market and place derivative 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 conflict as it is one of the most liquid markets in Europe. One of the traders, who runs derivatives strategies at a leading bank in London, recommends his clients to buy call options on French equity market volatility (.FCHI), which would allow them to trade the underlying financial asset even at a fixed price to buy them increases in conflict.

To cover some of the cost of such a bet, the trader is asking its clients to sell options on US stock market volatility, which it says are likely to be less affected by an escalation of the conflict. However, making such a two-pronged bet would also take away some of the profit should a conflict arise.

According to a statement released this week, Swiss bank UBS recommends buying call options on the yen or the US dollar. The two currencies would likely strengthen as investors look for safe havens in the event of a conflict, making the bets profitable.

Another UBS proposal is to buy put options on German stock benchmarks, a bet that pays off if the market falls. This is possible because German companies are dependent on Russian energy for production. Continue reading

Some investors seem to be picking up on this idea. A March 2022 put option on the DAX index, which would become profitable if the German index fell 10% below Wednesday’s closing levels, saw record volumes on Jan. 24 and again on Wednesday.


The upfront cost of protecting against what many still see as an unlikely event is making some investors hesitant to hedge, said Peter Ganry, Saxo Bank’s head of strategy.

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

Ganry recommends a different type of bet – buying publicly traded market-making companies like Virtu Financial (VIRT.O) and Flow Traders NV (FLOW.AS), which profit when market volatility rises and the difference between the ask and and the bid price increases, a security known as the bid-offer 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 in energy stocks that are exposed to both natural gas and oil. UBS estimates that Russia and Ukraine together account for almost 20% of the world’s gas and oil supply.

Roberto Lottici, fund manager at Banca Ifigest in Milan, is following a no-nonsense old-school strategy, going all-in on gold, doubling the size of his fund’s gold and silver investments to 6%, while also using put options and other hedging instruments that get expensive , shortens .

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

Russia Ukraine Graphic
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Reporting by Saikat Chatterjee and Danilo Masoni in Milan; Edited by Paritosh Bansal and Elaine Hardcastle

Our standards: The Thomson Reuters Trust Principles.

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