The Week in Russell 2000 Trading – 9/21 – 9/25

For the previous couple of weeks small cap stocks were the place to be.  That fad came to an abrupt end last week as the Russell 2000 (RUT) dropped almost 3.5%.  Over the same period of time the large cap focused Russell 1000 (RUI) was lower by 1.57%.  In addition to trailing RUI for the week, RUT is now 6.8% lower for 2015 while the RUI is down 5.92%.


For a while it appeared the CBOE Russell 2000 Volatility Index (RVX) was going to return to ‘normal’ levels when compared to VIX.  With the drop in the Russell 2000, RVX move higher over the balance of the week and finished less than a point higher than the large cap based VIX and at a premium of just over 3%.


At least one trader believes RUT is not going to regain last week’s loss in a very short period of time.  When RUT was at 1128.37 there was a seller of the RUT Sep 30th 1165 Calls at 0.65 who also purchased the RUT Sep 30th 1175 Calls for 0.25 and a net credit of 0.40.


Note on the payout diagram above that as long as RUT does not climb 3.3% between the trading date and RUT’s settlement print this coming Wednesday the result is a gain of 0.40.  If small caps rally tremendously to begin the week and RUT settlement is at 1175 (up 4.1%) or higher the net results is a loss of 9.60.  The dollar reward versus risk is a bit disconcerting, but this trader has to be really wrong for the worst case outcome for this trade.