Weekend Review – Russell 2000 Options and Volatility – 3/7 – 3/11

After stumbling a bit last week both the Russell 1000 (RUI) and Russell 2000 (RUT) moved higher with RUI up by about 1% and RUT rising 0.5%.  this is the first week in a while where RUT under performed RUI and the small cap benchmark is now lagging the large cap Russell 1000 by 3% for 2016.

RUT RUI

The relative implied volatility ticked up a bit for the CBOE Russell 2000 Volatility Index when compared to VIX.  The 2016 closing high for the RVX / VIX ratio occurred on February 1st and this past Thursday’s close was a rounding error below that high.  I think there may be more work to do on Russell 1000 and Russell 2000 performance after this relationship hits high levels.

RVX VIX

For the mean time at least one trader has a very gloomy outlook for the Russell 2000 leading into the summer.  Using the May 31st contracts a trader put on a 2 x 3 put spread through purchasing 2 RUT May 31st 940 Puts at 10.85 and selling 3 RUT May 31st 880 Puts for 5.40 each and a net cost of 5.50 per spread.  This trade occurred on Friday as the Russell 2000 was near 1073.

RUT PO

Note that just to get to break-even RUT needs to drop almost 13% from where the index was trading when the trade was initiated.  The best case scenario (for this trade, but not many market participants) is RUT at 880 or 17.99% lower and finally the downside break-even is down 28.66% (heaven help us if this happens).  One final thing of note is the closing low for RUT in 2016 is 969.34 so fresh lows are required for this trade to work out at expiration.