Small Caps in Turmoil, Albeit with Lower Anticipated Volatility

The Russell 2000 (RUT) is trading at 1094, 15% off all-time highs, and has only closed lower than this level on one occasion (9/29/15) in the past 14+ months. In October of 2014, amidst the worldwide Ebola scare, RUT closed at 1068 and traded as low as 1018.

Implied volatility of RUT options however, is rather sanguine despite the selloff in the benchmark Small Cap index. The CBOE Russell 2000 Volatility Index (RVX) “measures the market’s expectation of 30-day volatility implicit in the prices of near-term Russell 2000 options”. https://www.cboe.com/micro/rvx/

  • In October of 2014, RVX got as high as 30.
  • In August of 2015 (China/Global selloff), RVX measured just north of 46 (highest since 2011).
  • Less than a month ago, RVX traded up to 25.67.

In the most recent selloff in RUT, options volatility has been relatively muted – only moving as high as 24.60 on 1/4/16, and the high for today’s session (1/6) is 23.46.

Looking back 2 years, RVX has rarely been above the mid-20s and it will be interesting to watch Russell 2000 option volatility if the stock index selloff continues. Perhaps the somewhat muzzled volatility response indicates an orderly market. To this point, geopolitical unrest and disappointing data out of China has overwhelmed any January effect buying, which sometimes buoys the Small Caps at the beginning of the year.

RVX chart (1)