RSX: Russian Stocks Beckon the Brave

The crude oil crash hasn’t affected countries across the globe equally. While American indices have uttered nary a whimper until this week, Russian stocks have been beaten, whipped and then beaten again.

If there’s a worse-looking chart than the Market Vector Russia ETF Trust (RSX), I can’t find it.

Historically, emerging markets — think Brazil, Russian, India, China — have moved closely with commodity prices. So it shouldn’t be that surprising that the ongoing onslaught in the oil market has Russian stocks in a tizzy.

russian stocks rsx oil
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The following chart shows the RSX ETF with an overlay of crude oil. Their moves of late have been quite in sync as shown by the correlation study in the bottom panel. Matter of fact, at 0.97 you’d be hard-pressed to find any other two assets anywhere more linked than these right now.

Bottom line: The decline in RSX is unlikely to halt if crude oil continues plumbing new depths. So if you’re rooting for a rebound in mother Russia, root for an end to the pain in the oil markets.

How to Trade RSX

Suppose with Russian stocks now down 43% on the year and grossly oversold, your inner contrarian is growling. Rather than straight-up buying shares of RSX, the smarter play is to sell put options. The benefits are twofold. First, you can create a position that profits even if the RSX ETF falls a bit further before finally bouncing. Second, you can take advantage of the inflated premiums that RSX options are boasting right now.

To give yourself a greater margin for error, you can sell a longer-dated put which allows you to move further out of the money for a more substantial premium than what’s available from short-term puts.

Sell the Feb $15 put for 75 cents. Consider it a bet that RSX sits above $14.25 at Feb expiration. The max reward is capped at the initial 75 cents premium. By selling the put you obligate yourself to buy 100 shares of the RSX ETF if it sits below $15 at expiration. With the 75 cents in premium, your cost basis will actually drop to $14.25, though.

In timing your entry, I suggest waiting for some signs that RSX is rebounding. You could wait for the stock to break above a prior day’s high or at least enter an intraday uptrend.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

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