I started last week at the FTSE Russell offices participating in a panel discussion that focused on small cap stocks. It was hard to come up with much on the positive side as the Russell 2000 has struggled over the past few months. Every once in a while it appears RUT is about to gain upside traction, but those glimmers of hope seem to be short lived. Last week RUT was down 1.8% while the large cap focused Russell 1000 (RUI) was down about 1.2%. RUI finished the week at up 0.02% for 2016 while RUT is down 3.4% for the year.
A week ago the RVX / VIX premium closed at the highest levels for 2016. When RVX is at a greater than average premium to VIX it may signal concern about small cap stocks. The concern that was present a week ago was well founded as small caps underperformed over the following five trading days. The ratio is still at a relatively high level finishing the week around 30% which is lower than the previous week, but not low enough to signal a lack of concern for the small cap space.
Another one of those interesting out of the money credit spreads showed up at the Russell 2000 post on Friday. Late in the day there was a seller of the RUT Apr 22nd 990 Puts for 0.73 who purchased the RUT Apr 22nd 960 Puts at 0.43 for a credit of 0.30. The dollar risk for this trade is pretty scary with a potential maximum loss of 29.70. However, for that to come to fruition the Russell 2000 would need to lose 11.7% over ten trading days. Down 9.8% and this trade goes from a winner to a loser so in round number terms let’s just say this trader expects that the Russell 2000 will not lose more than 10% over the next two weeks.