The Week in Russell 2000 Trading – 9/28 – 10/2

For the second week in a row large cap stocks outperformed small cap stocks by about 1.5%.  The big difference this week was that the Russell 1000 (RUI) was higher while the Russell 2000 (RUT) lost value.  The previous week RUI lost less than RUT, but both had pretty lousy weeks.  For the year RUI is now down a little more than 5% while RUT has lost just over 7.5%.


The CBOE Russell 2000 Volatility (RVX) index finished the week at a little over a 10% premium to VIX.  This lack of premium can be attributed more to VIX and RVX both being in the low 20’s more than a lowered risk perception for small cap stocks versus large cap.


On Wednesday the Russell 2000 closed just a tad over 1100.  Just a tad after the market closed, but before the RUT options closed (15 minutes after the equity market close) there was a decent size seller of a RUT Jun 2016 1050 – 1150 Strangle.  The trader sold the RUT Jun 1050 Put at 71 and the RUT Jun 1150 Call for 54 which gets us to a credit of 125 per spread.  The payoff on the open on June 16 next year shows up in the payoff diagram below.


I highlighted two price levels in both directions.  As long as the RUT falls in a range of up or down 4.55% in June the result is a profit of 125 per spread.  There is more than 10% more wiggle room outside of the maximum profit range the trade has a partial profit if the Russell 2000 is not up or down by more than 15.91% from Wednesday’s closing price.