The Week in Russell 2000 Trading – 6/8 – 6/12

Small cap stocks continue the recent domination over large caps with the Russell 2000 outperforming the Russell 1000 again this week.  RUT gained 0.32% while RUI was up only 0.06%.  This puts the Russell 2000 higher by 5.01% for the year and the Russell 1000 up 2.27%.  The widening performance gap shows up in the price chart below where I indexed both the Russell 2000 and Russell 1000 to 100 at the beginning of the year.

RUI RUT

The CBOE Russell 2000 Volatility Index (RVX) was down slightly last week as was the large cap focused CBOE Volatility Index (VIX).  The relative performance change was a little surprising as the RVX / VIX premium closed at 16.19% on Friday June 8th and finished the week a little higher moving up to 17.05%.  It may just be that traders are more concerned about small cap performance relative to large cap performance despite the price action last week where small caps outperformed.

RVX VIX Chart

On Thursday I came across a late afternoon combination that I thought would be interesting to discuss in this space.  With the Russell 2000 at 1266.50 someone came in and executed a spread with three legs.  They purchased just under 1900 RUT Jul 17th 1180 Puts for 4.50, sold the same number RUT Jul 17th 1230 Puts at 12.00 and finished the trade by purchasing RUT Jul 17th 1300 Calls at 6.10.  The net result was a credit of 1.40 and a position with the payoff displayed below, of course if held to July 17th (AM) expiration.

RUT PO

The Russell 2000 between 1230 and 1300 at July 17th settlement would result in a profit equal to the credit received (1.40) when the trade was initiated.  The risk is definitely to the downside and if the Russell 2000 drops 7.1% or more the result is a loss of 48.60.  Finally, a rally over 1300 would be the best case scenario for this trade.