Weekly Review – Russell 2000 Options and Volatility

The pain continues for the Russell 2000 (RUT) in 2016 on both and absolute and relative basis.  For the year RUT is down over 14% while the large cap focused Russell 1000 (RUI) is only down about 9%.  The gap widened a bit this past week as RUI was down 1.00% and RUT lost 1.38%.


Last year, when the market got into a real panic mode, VIX climbed to higher levels that the CBOE Russell 2000 Volatility Index (RVX).  Despite the weakness in stocks this year RVX has maintained what has historically been a wide spread relative to VIX.  Most likely a combination of the equity market sell off being somewhat expected and the under performance of small cap stocks has contributed to RVX remaining at lofty levels.


With the implied volatility of RUT options hovering around 30.00 (based on RVX) the opportunities for out of the money credit spreads abounds.  On Friday, with RUT near 960, there was a seller of the RUT Mar 18th 1060 Call at 2.90 who then purchased the RUT Mar 18th 1080 Call for 1.55 taking in a credit of 1.35.  I like highlighting this trade as the risk is to the upside as opposed to the downside which is what I normally come across.


Note that a rally of over 10% needs to occur over the next five weeks for this trade to become a problem for the seller of this call spread.  I’m not saying it can’t happen, as these days anything can happen in the markets, but whoever put this trade on today probably felt pretty good about it on Friday.