Weekend Review – Russell 2000 Options and Volatility – 6/6 – 6/10

Only 5 basis points separate the 2016 performance for the Russell 2000 (RUT) and Russell 1000 (RUI). As of Friday RUI was in the lead, but do note early last week RUT finally surpassed RUI performance for 2016.

RUT RUI

The CBOE Russell 2000 Volatility Index (RVX) rose last week, as did just about every volatility index CBOE calculates. However, the rise in RVX lagged the rise in VIX on a percentage basis which resulted in a drop in the RVX / VIX premium to the lowest levels since March of this year. Typically, when there are global concerns VIX moves high relative to RVX. With some potentially market moving news on the horizon, the drop in the RVX / VIX premium is easily explained.

RVX VIX

Late Friday, with the equity markets hitting the lows of the week, a bullish spread that does OK if the market keeps dropping came into the RUT post. There was a buyer of the RUT Jul 29th 1200 Calls at 13.11 who then sold twice as many RUT Jul 29th 1220 Calls for 7.00 each and a net credit per spread of 0.89. The payoff at expiration shows up below.

RUT PO

Note if they are wrong, and RUT continues lower all options expire with no value and a net profit of 0.89. The best case is a close at 1220 and a profit of 20.89. A little over 1240 and the trader may start to consider rolling or exiting the trade. It is worth noting that RUT hasn’t moved much higher than 1170 this year.