(Refiles story, February 4th to Change Name to Garnry in 15th & 17th Paragraphs. Clarifies the designation in 15th Paragraph.

Saikat Chatterjee & Danilo Masoni

LONDON (Reuters – Worried by Russia’s sabre-rattling over Ukraine, traders search global markets looking for investment opportunities that can provide insurance against potential losses if the conflict escalates.

Conflict risks can lead to an increase in the risk of investing such as international stocks, and a rush towards so-called safe havens like government bonds and gold. This could leave those who are exposed to large losses in equities.

Investors often hedge against losses by purchasing assets that will pay back if things turn around, like derivatives that can profit from falling stocks and commodities.

According to five traders, markets are already moving in the face inflationary concerns, tighter monetary policies, and rising global growth. The cost of this protection has risen sharply over the past few days.

The European equivalent to Wall Street’s fear gauge, an index that calculates the volatility investors think stocks will behave over the near term, is trading at more than half its 2021 average. This indicates how hedging costs are rising due to increased demand.

For affordable protection, investors have to look deeper into markets.

Interviews with traders and investors revealed that they’re looking into a variety of strategies. These range from derivative bets about how French stocks will swing or how low German stocks will drop to looking at assets that would gain if the markets became worse.

Two major international banks traders, who asked anonymity to avoid being identified, stated that they recommend their clients examine the French stock exchange and place derivative bets about volatility. This is a gauge of the market’s intensity.

They expect that French stocks will be more volatile in case of conflict, as it is the largest European market.

The head of London’s derivatives strategy at the bank is suggesting that one of his traders recommends to clients buying call options on French stock markets volatility. These would give them the ability to purchase the underlying financial asset at an agreed price, regardless of how it changes in the event of conflict.

A trader tells his clients to buy options on U.S. Stock Market Volatility to offset the expense of making such a wager. This option is less likely to be affected by any conflict escalating. However, if there is a conflict, this two-pronged wager would reduce profits.

According to UBS, the Swiss bank recommends buying options on call the U.S. dollars or the yen. Both currencies will likely gain in value as investors look for safe havens during a conflict.

UBS also suggests that you buy put options on German stock benchmarks. This bet will pay out in the event of a market crash. Because of German energy production, this is possible.

This idea is being pursued by some investors. If the German Index falls 10%, the March 2022 put option could become profitable. It was a record-breaking deal on Tuesday, Jan. 24, and Wednesday, Wednesday.

EXTENDING APPEAL FOR GOLD Some investors have resisted hedges because they are afraid of paying the initial costs associated with protection against what some still consider an unlikely outcome, stated Peter Garnry from Saxo Bank, chief of equity strategy.

Amundi is an example of an investment house that assigns only 10% likelihood to a complete-fledged invasion.

Garnry advises a different kind of bet — buying listed market-making businesses like Virtu Financial (NASDAQ 🙂 and Flow Traders NV. This is because they benefit from rising market volatility and the increase in the spread between asking price and offer price, known as the bid-ask Spread.

Sumit Kendurkar (a market maker at Optiver Amsterdam) says there’s also an interest in upside calls for options in energy stocks that are exposed to oil and gas. UBS believes that Russia and Ukraine together account for almost 20% of the world’s oil and gas supplies. Roberto Lottici from Banca Ifigest Milan has a simple strategy: he invests in gold. His fund is doubled to include gold and silver, with a reduction of put options that have become more costly.

“If the situation spirals out of control,” Lottici said, “then it’s going to be one of the very few assets that can offer protection.”