The Week in Russell 2000 Trading – 10/26 – 10/30

I’m still playing some catch up from school work and travel which caused me to take my eye off the ball with respect to the markets.  It happens and when it does I’m always surprised by something that occurred while my mind and body were elsewhere.   The big surprise for me this time around was the disconnection between small and large cap stocks that happened over the past couple of weeks.

Over the last two weeks of October the Russell 2000 (RUT) was basically unchanged (down 0.04%) while the large cap focused Russell 1000 (RUI) was up over 2%.  That places RUI up 0.80% for the year while RUT is down 3.56% with 16% of the year to go.  RUT has a lot of catching up to do.

RUT RUI

When I put these blogs together I create the charts in the order I write about them.  So the RVX / VIX premium chart below was created after I saw what had happened between RUT and RUI over the past couple of weeks.  Even though I knew large cap stocks were doing much better than small caps, I was taken aback by the move in VIX relative to RVX.

RVX VIX

On Friday I checked in to RUT option trading and came across one trade that seems to come up a lot and another that made me think a bit.  The first trade is a bull put spread that has a very short term neutral to bullish outlook.  Late Friday with RUT around 1163 there was a seller of the RUT Nov 6th 1130 Puts at 2.18 who purchased RUT Nov 6th 1110 Puts for 0.88 and a credit of 1.30.  Their hope is by Friday morning’s settlement RUT stays above 1130 or doesn’t drop by more than 2.7%.

RUT PO 1

The second trade looks out to November 20th and just wants some market movement without really caring whether the move is higher or lower.  With RUT near 1160 there was a trader who purchased the RUT Nov 20th 1120 Puts for 7.74 and also bought the RUT Nov 20th 1190 Calls for 6.50 resulting in a cost of 14.24 for the RUT Nov 20th 1120 – 1190 strangle.  This trader needs at least a 3.8% rally or a 4.7% drop to break even at expiration.  Someone appears to betting on small caps leading the market lower or maybe trying to work to unchanged on the year over the next three weeks.

RUT PO 2