2 Potential Long/Short Trades To Play Russian Tensions

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 |  Includes: BICK, BKF, RSX
by: Brad Kenagy

Summary

The tension that has been caused by the Russian “Annexation” of Crimea has led to Russian stocks falling.

This unique opportunity has created the potential for two compelling long/short trades.

With the recent rally this week in Russian stocks, and sanctions occurring, there is opportunity to profit from the increased tensions.

In this article, I will be constructing two potential long/short trades using ETFs to capitalize if tensions with Russia continue to escalate. The escalation of tensions has been quite orderly, with each side slightly ratcheting up little by little, as each day passes. I expect this to continue until a resolution has been reached, and thus until that happens I would expect the tensions with Russia to continue growing, and thus as tensions rise Russian stocks have the potential to fall.

Long/Short Trade Idea #1

Long Leg of Trade: For the long position, my idea is to go long the iShares MSCI BRIC ETF (NYSEARCA:BKF), which is the most popular BRIC ETF. The reason I chose BKF was it is the largest and most liquid BRIC ETF, and in addition, according to its holdings page, BKF holds 12.39% in Russian stocks. Since February 26th when Russian troops were sent to Crimea, BKF has had a -3.51% return.

Short Leg of Trade: For the short position, my idea is to go short the Market Vectors Russia ETF (NYSEARCA:RSX), which is the most popular ETF for Russian stocks. Since February 26th when Russian troops were sent to Crimea, RSX has had a -6.79% return.

Trade overview: If this trade had been initiated at the start of the crisis with a 50% long allocation to BKF, and a 50% short allocation to RSX, the return so far would have been +1.64%. If tensions do continue to rise, then the trade I would expect to continue to be profitable, because Russian stocks will fall by more than other BRIC nations.

Long/Short Trade Idea #2

Long Leg of Trade: For the long position, my idea is to go long First Trust BICK Index ETF (NASDAQ:BICK), which is a variation of BRIC with a country change. The reason I chose BICK was that unlike other BRIC ETFs, BICK excludes Russian stocks, and includes stocks for South Korea instead. Because of this BICK has outperformed BRIC ETF's like BKF. Since February 26th when Russian troops were sent to Crimea, BKF has had a -2.27% return.

Short Leg of Trade: For the short position, my idea is to go long BKF, which is the most popular BRIC ETF. The reasons I chose BKF are detailed in the previous trade above. Since February 26th when Russian troops were sent to Crimea, BKF has had a -3.51% return.

Trade overview: If this trade had been initiated at the start of the crisis with a 50% long allocation to BICK, and a 50% short allocation to BKF, so far would have been +0.62%. If tensions do continue to rise, then the trade I would expect to continue to be profitable. Because each ETF has a lot of the same exposure to countries, the trade essentially is a neutral position for Brazil, China, & India, long South Korea, and short Russia.

Closing Thoughts

Each trade has risks of turning around if tensions ease, and a mini preview of what would happen if Russian stocks rallied has been previewed in the last week. All three ETFs, BKF, RSX, and BICK, all hit a crisis low on March 13th, and since then Russian stocks have rallied 11.69%, BKF is up 3.30%, and BICK is up 2.02%. Therefore, if someone had initiated the trade ideas in this article on March 13th the returns would be: -4.19% for the Long BKF, short RSX trade, and -0.64% for the Long BICK, short BKF trade. In closing, I believe the tensions with Russia will continue to rise, because of sanctions that are about to be levied, and this short-term rally in Russian stocks will be short-lived and Russian stocks will resume the downtrend that has been in place.

Disclaimer

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.