Ukraine, Russia, Oil, Options
Over the past few weeks, headlines have circled the media explaining Putin’s intention to invade parts of Ukraine. Investors have felt the effects in the market while it all unfolds. Yesterday, February 23rd, the Russia index made history after opening down 40% overnight as news broke that Russia had begun its invasion. This article will go over what is going on, what it means for investors, and how options continue to be the best tool for predicting future possibilities in not only the market but also global events.
Why does Putin want Ukraine? When the news was first announced I was skeptical. For anyone that follows me on Twitter, you might’ve seen my jokes poking fun at Putin and assuming he was bluffing. At the time I was unsure as to why he is even interested in the state of Ukraine but as time went on the reasoning was made clear. Putin has made the claim that Ukraine is a piece of Russian history and has the intent of keeping the country from joining European allies such as NATO. “Ukraine was part of the Soviet Union before its collapse at the end of the Cold War in 1991, and it borders Russia to its eastern flank, where, historically, it has been most vulnerable to invasion.” (Wall Street Journal). As days pass, more information is being shared on Putin’s motive towards Ukraine.
In the face of this invasion, Ukraine isn’t going down without a fight. Ukraine President Zelenskyy has informed his citizens that their support is needed. Citizens have been advised to arm up or donate blood to aid the military. “We will give weapons to anyone who wants to defend the country,” said Zelenskyy on Thursday. Zelenskyy has simultaneously signed an order that will prohibit males between the ages of 18 to 60 from leaving the country. This comes shortly after the President enacted marshall law on Thursday. “We are strong. We are ready for everything. We will win over everybody because we are Ukraine.” As it stands, Ukrainian forces have “inflicted about 800 casualties on Russian forces.” (The Week). Social media has granted the west with on-ground coverage where Ukrainian citizens are seen waiting in long lines at ATMs, gas stations, and supermarkets. Protests have erupted across bordering European nations as they oppose and speak out against the war. In Russia’s own city of Moskow, we are seeing protests against the government’s actions. The country’s citizens are facing physical abuse for verbal retaliation. For anyone interested in supporting Ukraine and its citizens, you can click the link here and find a list of donation locations thanks to NPR.
How does this affect the US? Russia is one of the largest oil producers in the world but most of this gets sent to China and European countries. Oil prices rose above $100/barrel for the first time in 7 years. The energy sector has seen relentless demand since late December and the actions overseas have only added fuel to the fire. Since the pandemic, oil demand has remained elevated even with the transition from office to home office. The issue wasn’t a lack of demand but a lack of supply as production slowed down due to the uncertainty covid led to. Oil prices in the United States are beginning to average more than $3.50 a gallon (California is seeing 4.35 to 5.10), the highest increase since 2014. Biden spoke on the Russian events today (February 24th) and stated his urgency to prevent Americans from feeling the pain at the pump moving forward. Crude oil prices opened higher on Thursday morning and sold off throughout the rest of the session. It could be deemed that this is a “buy the rumor, sell the news” event for oil but we will see how it pans out.
What does the market say? What did the options market expect?
Thursday’s violent drawdown was met with an even more violent rally as the S&P index recovered all of its losses after hitting a low of 410 and closing at 428. Volatility finally acted appropriately as the index fell throughout the day. The options market seemed unsure of what may come in the future as most of the contracts that were traded for the index were set to expire in less than 4 days. Put holders looked to be closing out their positions throughout the day after such a violent drop adding some upside to the S&P. The Russell 2000 index hit its January low and rallied throughout the day as well following a large purchase of the June 190 calls near the open. With global events continuing, it is my less optimistic side saying we may not be out of the woods yet. Options traders stepped in after the close to make large put purchases in the IWM & the S&P. IWM 188 puts expiring March 18th were purchased for a whopping 11 million in premium after the closing bell and the S&P saw multiple large purchases in the 405, 403, and 398 puts expiring on March 18th, 2022. As more Russian news develops, the sentiment will likely remain mixed but based on historic data, investors that purchased the invasion saw significant returns. We will see how it is moving forward but as I’m writing this, the futures market is down 1.50%.
From January 4th onward, options traders began purchasing put contracts on the RSX, the Russia ETF created by VanEck. The options purchasers had made bets against the ETF at the start of the year and were well ahead of the rest of the world. As the month passed on, the RSX continues its traverse moves between 25 and 19 dollars a share. At the start of February, the headlines began shifting in their favor. On February 11th the put purchases had sparked up again in the RSX and the index has fallen 40%. Some investors look at options as lottery tickets and gambles since retail investors began dabbling with these contracts but I’d take the other side of that argument and say they’re one of the stronger indicators in the market. Options traders take positions prior to the release of any news or event in hopes of gaining from the expected move combined with the increased volatility. The Russian invasion has some investors bracing for the possibility of China making an attempt at reclaiming Taiwan. On Tuesday, February 23rd, options traders purchased 40,000 62 puts on VanEck’s EWT Taiwan ETF set to expire in April of this year. This morning more traders had entered the market and purchased the 60.63 puts expiring in March. With geopolitical events taking place, it could merely be protection but it is highly unlikely.
Our thoughts and prayers go out to those affected by the events taking place in the Ukraine and Russia. This article was written based on information provided at the time. Moving forward more updates will be provided by quicker sources but this article is intended to inform those who are unaware of what is occurring overseas. I hope you enjoyed reading it.