The Week in Russell 2000 Option Trading – 5/18 – 5/22

Small cap stocks took the lead from large cap stocks for 2015 last week as the Russell 2000 (RUT) was up 0.66% while the Russell 1000 (RUI) rose only 0.20%. That places RUT slightly in the lead up 3.94% for 2015 versus RUI up 3.73% for the year.

RUI RUT

I came across an article from Friday that was discussing how low volatility is for the Russell 2000. I always like to think of volatility in relative terms and for the CBOE Russell 2000 Volatility Index (RVX) this means comparing it to VIX. Using the percent premium of RVX versus VIX, small cap volatility actually rose versus large cap volatility last week. This was surprising considering small cap stocks outperformed large cap stocks.

RVX VIX

Finally, two minutes before the market closed for the three day holiday someone with a fairly neutral outlook for this coming week put on a favorite of many traders, an Iron Condor, using RUT Weeklys that expire on the open this coming Friday. I always make it a point to remind readers that RUT options are AM settled. The specific trade was a 125 lot, buying the RUT May 29th 1230 Put for 1.74, selling the RUT May 29th 1235 Put at 2.47, selling the RUT May 29th 1265 Call at 2.16 and finishing up with purchasing the RUT May 29th 1270 Call for 1.36 and a net credit of 1.53. The payout, if held to settlement on Friday morning appears below –

RUT PO

The up and down levels noted on the diagram are based on the short strikes for this iron condor.   May 29th RUT settlement above 1235, which is 1.4% lower than Friday’s close or a settlement above 1265, which is a rise of 1.1% will result in either the short put or short call being in the money. My assumption is this trader hopes for the Russell 2000 to stay in an up or down 1% range between now and Friday morning.