Investors Think The Russian Ruble Is In A Lot Of Truble

Investors Think The Russian Ruble Is In A Lot Of Truble
Stéphane Renevier, CFA

about 2 years ago1 min

You don’t have to trade options to benefit from them: simply observing them can provide useful information about what the wider market is expecting. And right now, it seems like it’s expecting things to get much, much worse for Russia’s currency, the ruble (RUB).

To understand what I mean, you only need to look at the “risk reversal” indicator, which compares the cost of buying an out-of-the-money call option to buying a put option with similar characteristics (i.e. the same maturity and sensitivity to the underlying asset’s current price). The higher the indicator, the higher the premium that investors are willing to pay for the call than the corresponding put.

Now, the ruble is quoted in dollars, which means a higher exchange rate erodes its value (i.e. you get more dollars for 1 ruble, so fewer rubles for 1 dollar). So when investors favor calls over puts, they’re doing so to protect themselves against further depreciation in the ruble. And right now, they really are favoring calls over puts: the premium is currently twice as high as it is even in the case of another exceptionally risky currency, the Turkish lira. So it’s fair to say investors are betting things are about to get even worse for the ruble from here.

There are two ways you could use this information. First, you should definitely take it as a warning if you own Russian assets. Second, a high risk-reversal premium means you could pocket a tidy sum by buying the cheaper put and selling the more expensive call. Of course, it means you’d be long the ruble, so you’d better make sure you have the stomach for it…

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