Large cap stocks eked out a win last week with the Russell 1000 (RUI) rising 0.69% versus a 0.48% gain for the Russell 2000 (RUT). The chart below indexes the performance for RUI and RUT to 100 at the beginning of 2015 for an apples to apples comparison.
Despite RUT and RUI basically performing in line with each other, large cap risk, as indicated by index option pricing, dropped a bit relative to small cap risk. The chart below displays the percent premium of the CBOE Russell 2000 Volatility Index (RVX) relative to the CBOE Volatility Index (VIX). VIX is a measure of large cap risk while RVX is a measure of small cap risk. Historically RVX maintains levels higher than VIX so this is a common method of comparing these two volatility indexes. Two weeks ago small cap stocks suffered compared to the drop in large caps and the result was RVX closing more than a 30% premium relative to VIX for the first time in several weeks. This past week, this premium actually topped 40% for only the second time this year.
On Tuesday the Russell 2000 came under pressure in line with the other broad based equity markets. When this happens I go looking for short dated out of the money put spreads and there was a sizeable on that came into the market late that day. There was a seller of 25,000 RUT Aug 14th 1165 Puts at 0.54 who purchased 25,000 RUT Aug 14th 1155 Puts for 0.39 and a net (pre-commission) credit of 0.15. The Russell 2000 closed the day down about 10 points at 1211.14. In order for this trade to be in trouble, August 14th (AM) RUT settlement would need to come in below 1164.85 or a drop of about 3.8%. We now know that didn’t happen and the story ended well for the seller of this spread.