Russian Options Volatility Jumps on Mechel Probe, Troika Says

By William Mauldin

July 29 (Bloomberg) -- Option prices on Russia's RTS Index reached the highest since March, indicating investors are more concerned about risk after the government began an investigation into steel and coal producer OAO Mechel, Troika Dialog said.

Implied volatility, which measures the cost of using options as insurance against declines, on RTS Index options expiring in September gained 10 percent to 31.7, according to Troika Dialog.

``Volatility has increased markedly, spurred by a reassessment of the country's risk by many investors,'' Moscow- based Troika wrote in a report today. ``The negative sentiment was greatly exacerbated by the developments surrounding Mechel'' and implied volatility could ``spike if panic continues.''

Mechel sold raw materials at twice the price in Russia as it did abroad, and the company also ``avoided taxes'' using a scheme that reduced its taxable income using offshore traders, Prime Minister Vladimir Putin said in comments broadcast yesterday and on July 24 on state television. Mechel, whose shares trade mostly in the U.S. as American depositary receipts, has lost two-thirds of its value since its May 30 record high.

Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell. Investors use options to guard against fluctuations in the price of securities they already own, make leveraged bets on shares or wager that volatility, or stock-price swings, will increase or decrease.

To contact the reporter on this story: William Mauldin in Moscow at wmauldin1@bloomberg.net.