Weekend Review – Russell 2000 Options and Volatility – 3/21 – 3/24

The Russell 2000 (RUT) gave up 2% last week after making a little run at closing the 2016 gap with the Russell 1000 (RUI).  RUT is now down just about 5% for 2016.  There was a glimmer of hope for large caps this time last week, but RUI gave up 0.70% last week and is now 0.65% lower for 2016.


The concern for small cap stocks continues to rise relative to large cap stocks in the form of the ratio of the CBOE Russell 2000 Volatility Index (RVX) relative to VIX.  The gap between the two closed over 30% each day this past week.  I’m going to do some digging on this one and report back later this week on the RVX – VIX relationship and take a look at periods where this spread has been consistently wide like this in the past.


One of my favorite trading structures popped up in the RUT block trade list from Thursday.  Mid-day with RUT at 1068.57 a trader sold 1850 RUT Apr 15th 1060 Puts at 15.70 and bought 1850 RUT Dec 16th 1060 Puts for 76.60.  The net result was a cost of 60.90 for this calendar spread and a payoff at April 15th expiration that looks like the diagram below.


I’m thinking this may be the beginning of a bearish position in the Russell 2000 that will involve selling more shorter dated RUT Puts over the course of 2016, we’ll see if my theory holds true as we keep an eye out for any rolling transactions or sales of 1850 RUT Puts just before or after the April 15th expiration date.