Weekly Review – Russell 2000 Options and Volatility – 1/25 – 1/29

The Russell 1000 (RUI) and Russell 2000 (RUT) both put up a respectable week.  However despite the positive week, RUT finished January down 8.85% while RUI was down 5.49%.

RUT RUI

In an interesting twist, RVX climbed to what is considered a normal premium to VIX last week.  As VIX moved lower, RVX did as well, but not as rapidly.  The result is an RVX to VIX premium of around 20% which is close to the average for the past few years.

RVX VIX

At least one trader is bullish on small caps and expressed that bullish sentiment by purchasing almost 1000 RUT Mar 11th 1080 Calls at 7.50.  This trade went off on Friday around lunch time while RUT was just over 1021.  Kudos on the execution as RUT finished the day over 1035.  To save you the trouble, I looked up the closing market for this 1080 Call.  The bid side of the calls was 10.00 so the trade has an unrealized profit of 2.50.

RUT PO

To break even at expiration RUT needs to reach 1087.50.  Based on Friday’s close of 1035.38 this would involve a move of about 52 points or 5%.  That may sound a little aggressive for a six week trade, but even at 1087.50 RUT would still be lower for 2016.  Just for kicks I added where we began the year to this payoff diagram.  An understatement is that a full recovery would result in quite a nice profit for this trader.