Trading in options linked to Russian stock indices has fallen to its lowest level in almost a year, after a spurt of post-US election activity ran out of steam on escalating geopolitical tensions.
Average daily volume in Frankfurt-listed options linked to the US dollar-denominated RDX index fell to just 1,293 contracts in April - almost half the level seen a year previously and down from over 5,000 at the 2013 peak.
For Russian brokers that bet on sanctions relief to drive international demand for Russian futures and options, rising tensions have delivered a blow, but many remain optimistic for a softening of the political stance in the coming months, while ultra-low volatility levels could finally put Russia on the radar of relative value vol traders.
According to Matthieu Ressencourt, head of equity derivatives trading at BCS Global Markets in London, an uptick in first-quarter Russian volatility drove a glut of upside call option demand from international investors seeking exposure to the region.
“Unfortunately, it didn’t realise because of rising geopolitical tensions, but even in recent weeks we’ve seen some international firms entering into upside calls on the probability of sanctions being lifted by the end of the year,” said Ressencourt.
The Moscow-based broker scaled up its London and New York operations in 2016, capitalising on access to domestic over-the-counter options liquidity to offer international clients aggressive pricing in LSE and Eurex-listed Russian derivatives.
Although reaching a top three position in both markets, international demand has slowed, forcing the broker to rely on domestic activities. Large Russian corporates and family offices have remained active in the options market, selling volatility through call-writing strategies to enhance yield.
Volatility has been dampened by the slew of one-way flow. Ressencourt notes that domestic clients are selling call options to generate yield, and put options as a directional entry point, which is pushing volatility lower. The Moscow Exchange’s Russian Volatility Index (RVI) is currently close to historic lows at 22 – down from more than 50 at the start of 2016.
“There’s a good opportunity for clients to buy Russian volatility here, as a standalone or as a relative value trade against other EM vol.” said Ressencourt. “Pure volatility funds don’t tend to look at Russia, but we are trying to reach the right hedge funds that could provide that two-way flow.”
He notes that the US VIX might have to fall to levels of seven or eight - a new record low - in order for Russian vol to fall below 20.
“If you are long Russian volatility at the moment you probably can’t lose too much.”
Only a handful of dedicated volatility funds currently trade Russian volatility, most of them located in California, such as Parallax Volatility Advisers.
In order to reach US-based vol-arb funds, BCS is seeking approval from the CFTC to sell derivatives directly to US clients. In January, the broker went live in the US with access to CBOE, enabling the firm to trade US-listed options on Russian stocks and offload risk stemming from its domestic activities.
For the time being, the broker is capitalising on renewed interest in the region from international banks and their clients.
One US bank recently opened cash equity accounts with the broker to access the Russian liquidity for its range of basket trades and exchange-traded funds. That bank is considering an expansion of the agreement to include derivatives, while a European dealer has also made a similar request.