I wanted to think through the potential scenarios with RSX for the coming weeks and writing it down is the easiest to have it organised in my head, hopefully it helps others to make decisions too.
As we all know, RSX is halted indefinitely. What this means for us put holders is ambiguous at this moment and there are several ways this can go in the following weeks. There is a lot to consider, and the considerations may differ depending on what expiration, what strike put you are holding.
- MOEX
The first definite factor that should have an impact on the decision you will make is whether MOEX opens next week, or they will keep pushing the opening. We will have more information about this before the next expiration for sure. Why is this important?
Currently almost all holdings of RSX are suspended from trading, meaning RSX NAV is mostly frozen too, other than small overall movement. What happens when MOEX opens is also not clear currently.
Foreigners to Russia are currently banned from selling stocks on MOEX, even from closing their positions. Short selling is also prohibited. This means that selling pressure will be somewhat lowered, but it will be a bloodbath anyway, no question.
And here comes the part that is a little concerning to me if MOEX opens next week. RSX NAV is currently calculated by assuming a drop of 95.573% in the stocks traded on MOEX compared to 25 Feb. If on the opening day MOEX holdings drop 70% from 25 Feb, that would result in an increase of 578% compared to 3 Mar calculated market value in RSX. Ceteris paribus, this would increase RSX NAV from $87.9M to $133.1M or a NAV/Share of $1.39. Assuming a more conservative 50% drop in MOEX holdings, NAV/Share would be $1.76.
Now this doesn`t sound too bad, still way in the money for the puts most of us likely holds. There is also an argument to be made that some of these companies are actually worthless, if not in their fundementals, then because the Russian market is considered uninvestible, so a larger than 70% drop may be possible.
The following companies are included in the above calculation, if anyone hs time to research how they have been affected fundemantally due to the sanctions, and other considerations:
TRNFP
ALRS
MOEX
IRAO
RTKM
RASP
- London Stock Exchange
The next part to have the potential to have similar effects is the GDRs trading on the London Stock Exchange (currently halted from trading). This is more complex as there are more aspects to look into.
These are essentially certificates to allow easier access to foreing investments, that any holder can trade in for the stocks trading on MOEX. In a regular scenario these should be following the price of the stock trading on MOEX. Considering the current developments where foreign investors are not allowed to close their long position on MOEX traded stocks, it is safe to assume that it will be a least somewhat decoupled, as it is currently unknown how long this restriction would last after MOEX opens. There is also another argument, as to whether these certificates will be honored at all. With the exception of one stock, all of these have lost over 90% of their value since 25 Feb, the one exception lost 84%.
Based on these points, assuming MOEX opens, there are a couple of possibilites to what happens here.
2a. GDRs remain suspended without notice to whether they are being delisted or the halt is temporary. This would likely result in an increase in calculated NAV, as we can see that RSX calculates it with assuming movement in suspended stocks based on the movement of trading stocks.
2b. GDRs remain suspended, and announced to be delisted from LSE. This would result in NAV either keeping at current level, or likely losing the remaining value. Best case scenario
2c. GDRs resume trading together with MOEX. Prices of the stocks could be affected by their primary listed counterparts. As per above, if MOEX drops less then the avg decline in the GDRs since 25 Feb these could increase in value. While the restrictions and uncertainty will no doubt result in a lower price in comparison to their primary listings, there will be people who sees this as a extreme risk/high reward scenario.
For the sake of having numbers to consider, calculated below is the scenario where prices will be coupled with MOEX counterparts and MOEX drops 70%/50%.
In case of MOEX dropping by 70%, a full correlation would result in an increase of $300M in NAV, to a total NAV of $433M or a NAV/Share of $4.52.
In case of MOEX dropping by 50%, a full correlation would result in an increase of $531M in NAV, to a total NAV of $700M or a NAV/Share of $7.3
This is the worst case scenario in my head. I cannot imagine MOEX dropping less then 50% in the first day of trading, and I also cannot imagine GDRs fully correlating to their primary listing.
But would information come to the contrary, be prepared that mathematically, there is a chance that the last traded price of RSX would be a discount rather that the premium we are used to now.
- Timing
Considering there is a real possibility that come 11 March, we will have no more information than today, let`s walk through the hypotheticals.
My current understanding to what happens in case you hold puts and RSX is still halted:
You have a choice to make, you either exercise the option or let it expire worthless. Since to the best of my knowledge RSX is physical delivery settled, exercising your put contracts would result in receiving cash in the amount of your strike*100, and opening a short position of 100 shares. There are multiple scenarios here as well, and the above rough calculations are there to put a little extra considerations to help your decision making would this scenario come next week.
a. You hold ITM puts. Lets say you have $6 strikes, you exercise your put, receive $600 and have a short positions of 100 RSX shares. At last traded price of $5.88 you would likely be in a loss on your position, but still better off then not exercising, IF the price of RSX would remain the same, as you would get back some of your premium paid for the contract. If you don`t believe in the worst case scenario, this is potentially a situation where exercising is definitely worth considering, as at current price you negate losses.
b. You hold ATM/not too far OTM puts. Holding $4-$5 strikes are a little different story, as there is a higher likelyhood that NAV would reach up to this, but more importantly, exercising these would immediately put you in a negative P/L, as you would essentially have a short position with an avg price significantly lower than the last traded price. Not having enough funds in your account may result in not being able to exercise these, as it coul result in an instant margin call in my understanding. Why would you want to even consider exercising your OTM option? Would the best case scenario come, which is an announcement of the liquidation of RSX as well as delisting of GDRs and ADRs, should trading resume, a huge drop to around NAV is expected.
This is where you would need to be prepared for making decisions. Do you think NAV would drop below your strike? Do you think it is likely for RSX to liquidate? If your answer to these questions are yes, do you have enough funds in your account to open a short position against exercising? Are you even allowed to open short position in your account? Is RSX even available to short?
Lot of questions, some of which you have to decide for yourself, some of which you have to discuss with your broker well in advance of your expiry date to have time to act if there is anything you need to do in preparation.
c. You have far OTM puts. Hopefully most people have received the message of not taking on too many risks and not many have these. These are the most risky, and personally I would let most of these expire worthless if we have no news with basically the best case scenario. Even in a scenario where liquidation occurs, it is entirely possible and to an extent likely that the NAV will be higher than currently is. So holding a $1 or even a $2 strike would likely put your contract OTM of NAV.
Closing
Even though everything is halted, there is a lot of moving parts here. I didn`t talk about US listed ADRs, which are likely waiting on a further drop if they unhalt, or potentially delisting, these would likely lower NAV in any case. My intention with this was to present possible bad case scenarios, so noone is blindsided by hype. While imagining a best case is always nice, reality is not that simple. Think about your options, think what could go wrong, think about what you are risking.
As for my opinion, which is only that, an opinion. I find it unlikely that MOEX opens next week, unless some unexpected development occurs to the Ukraine/Russia situation. I don`t see a reason they would open now. The longer MOEX remains closed, the more likely RSX is delisted in my opinion. The ideal scenario for me would be MOEX not opening next week, ADRs GDRs delisting, RSX to announce liquidation, OCC to provide settlement price for options in advance of 11 March expiry. I dont think this is the likely scenario, but it would be ideal.