Block Trade – Deep OTM RUT Put Spread from 1/14

I know this is a bit dated, but looking at Wednesday’s block trades something stood out to me in the Russell 2000 Index (RUT) option arena. A large (over 20,000 contracts) block trade went off in the RUT Jan 23rd 1060 and RUT Jan 23rd 1070 Puts. The trade was a far out of the money bull put spread with the RUT Jan 23rd 1070 Puts being sold for 1.15 and the RUT Jan 23rd 1060 Puts being purchased for 1.00 and a net credit of 0.15. As will all vertical credit spreads the maximum profit for this trade is the 0.15 taken in when the trade was initiated. The potential loss is 9.85 if the Russell 2000 drops to 1060 or lower by next Friday. This is shown in the payoff diagram below which also highlights where the Russell 2000 closed on Wednesday (1177).

RUT Payoff

This is a big dollar risk for a little dollar reward, but a lot has to go wrong for this trade to end up down 9.85 at expiration. Specifically the break-even level (1069.85) is over 9% lower than where the RUT closed yesterday. And almost a 10% drop would be needed (in a very short period of time) for the loss to max out at 9.85. The price chart shows RUT price action through Wednesday along with blank space to represent the remaining six (including today) trading days remaining until expiration next Friday.

RUT Daily Fixed