The recent market rally we have seen seen has been driven by big cap names such as AAPL, FB, GOOG, but this week it would appear small cap is catching up based on price action in the Russell 2000 small cap index (CBOE: RUT 11.77.32).
Small cap stocks are traditionally a big favorite of mutual funds – popular investment vehicles for traditional retirement investors, the same individuals who are known for driving the year-end ‘Santa Clause Rally.’
As year-end approaches, these types of investors are scrambling to invest year-end bonuses and might also look to lock-in their IRA tax deductions before year-end.
Year-to-date, the S&P 500 is up around 1.8 percent whereas the Russell 2k is off by 2.55 percent – a performance differential of 4.3 percent.
Looking at the RUT Dec Quarterly 1175 Straddle, it is priced at $53.75 or implying a move of about 4.5 percent. The implied move is just slightly more than the performance differential previously mentioned.
With the FOMC press conference on December 16, I’m more concerned with volatility dampening a Santa Clause rally, so I look to January expiration to give myself more time to play RUT.
My ‘year-end’ trade:
Buy the RUT Jan 1210-1230 Bull CS for $6.35
Max Risk: $635 per 1 lot
Max Reward: $1365
Break-even level (at expiration): 1216.35
I like this trade because it gives me additional time to get past the FOMC catalyst, but is still roughly aligned with the year-end measured move target.