Weekend Review – Russell 2000 Index and Volatility – 5/23 – 5/27

Small cap stocks continue to show some strength with the Russell 2000 (RUT) beating the Russell 1000 (RUI) for the second week in a row. Is this the beginning of a streak? RUT rose 3.43% last week while the large cap focused RUI gained 2.28%. For the year RUT is now up 1.28%, still lagging RUI which is up 2.63%.

RUT RUI

The RVX / VIX premium remains at the high end of this year’s range, despite the strong performance from small cap stocks. It may be that the uncertainty about the Fed’s next meeting in June is hanging over small cap stocks a little more than large cap stocks.

RVX VIX

Each day of the week one of the instructors from the Options Institute goes on CBOE-TV to discuss a large trade that has caught our attention. I liked the trade I spoke of on Wednesday this past week so much that I’ve decided to include it in this space as well. This double dip is not a case of me being lazy, you can call me many negative things that are true, but lazy sure isn’t one of them.

Wednesday morning last week someone came in and put on a RUT Aug 19th 1050 – 1060 – 1200 – 1210 Iron Condor taking in a credit of 4.26. The payoff diagram bellow shows the payout if this trade is held through AM settlement which will be calculated on open August 19th.

RUT PO

Note the range where all options expire in this trade is over 12% wide. As long as the Russell 2000 does not move up by about 5.25% or drop by 7% this trade works out with a maximum profit equal to the credit received when the trade was placed. We use to say the equity market was boring in the summer (see August of 2011 or last year to understand why I say we ‘use to say’ this). The trader in this case is hoping for a return to the normal that is boring for the equity markets during the dog days of summer.