Weekend Review – Russell 2000 Index and Volatility – 5/31 – 6/3

The Russell 2000 – How about that??? I hear Mel Allen’s voice as I type that. Small caps went on a relative tear last week with the Russell 2000 (RUT) rising 1.19% last week while the large cap focused Russell 1000 was up 0.10%. This places RUT up 2.49% for 2016, within striking distance of the Russell 1000 which is up 2.73% year to date. More impressive is the relative performance since the lows in February. RUT has rebounded 22.1% off this year’s closing low and RUI is up 15.6% over the same time period.

RUI RUT Performance

Despite the outperformance of RUT, small cap volatility rose last week as well. Both VIX and the CBOE Russell 2000 Volatility Index (RVX) were higher last week which is partially a function of the three-day weekend. But RVX rose a bit more and the premium of RVX to VIX finished the week just shy of 30%.


A RUT trade from two weeks ago caught my eye and I wanted to monitor it to expiration so I can talk about the beginning and end of the trade in this space instead of giving just half the story.   Early on Thursday May 26th, with RUT around 1140 someone came in and sold the RUT Jun 3rd 1130 Puts for 5.69 and then bought some ‘protection’ by purchasing the Jun 3rd 900 Puts for 0.04 and a net trade credit of 5.65. I put protection in little quote marks because they aren’t getting much for that 0.04 cost. You can see this in the payoff diagram below.


Note to benefit from the long 900 put the Russell 2000 needs to drop 21% from the time of the trade. I assume this trader was working with some sort of stop loss intending to exit trade long before RUT gets down to 900. My other assumption is the purchase of the 900 put was to make their broker happy since most traders don’t have permission to sell options without some sort of protection.  Either way, things turned out well as RUT finished the day almost 35 points higher than the short strike of this spread.