FxWirePro: Obtain optimal hedge in USD/RUB via “Diagonal Credit Call Spreads” to arrest both short-term bears and long-term upside risks

We encourage longs in USDRUB for long term investing amid short-term slumps, the broader setback to the dollar combined with upward pressure on oil prices to new highs this week have conspired to pull USDRUB lower in short run, while Fed’s hawkish rhetoric remains intact that could propel dollars robustness.

On the flip side, we, nevertheless, believe that the CBR’s new intervention regime should suffice to neutralize the currency demand that results from rising oil prices.

The finance ministry set daily intervention for February at RUB 11bn, which at current exchange rates is very close to the $2bn per month we had estimated.

Such an amount is equivalent to two-thirds the estimated run-rate for the current account surplus this year.

Hedging Strategy (USDRUB):

For now, contemplating bullish rout in long run amid short-term slumps in USDRUB, we advocate 1m3m USDRUB 1x1 diagonal credit call spread with conviction (52.3076, 60.56), at spot ref: 57.4337 the positions could be entered at the net credit.

Execution: Keeping the above fundamental factors in mind, it is advisable to go long in 3M (strike at 60.56) OTM 0.36 delta call while writing 1m ITM call (strike at 52.3076) with positive theta and delta closer to zero (both sides use European style options), this credit call spread option trading strategy is recommended when USDRUB spot FX price is anticipated to drop moderately in the near term and spikes up in long term.

The premiums received on the short leg with positive theta would likely optimize hedging position on the long leg as we chose diagonal expireis.