Weekend Review – Russell 2000 Volatility and Options – 6/20 – 6/24

Both large and small cap stocks got hit on a week over week basis, with the Russell 2000 (RUT) holding up slightly better (-1.47%) than the Russell 1000 (RUI) which lost 1.62%. For the year both are down less than 1% with RUI holding a slight year to date performance edge of 0.40%.


In the past when there is heightened concern regarding the global equity markets the RVX / VIX premium tends to drop to low level. That happened in early 2016 and that happened again Friday as the premium for the CBOE Russell 2000 Volatility Index (RVX) to VIX dropped to 5% which is the lowest levels seen in over five months.


When we have drops or even rallies in RUT I go looking for out of the money credit spread sellers. On Friday I didn’t have to look to hard to find one late in the day. With RUT around 1125.00 there was a seller of put spread using the standard July 15th options. They came in and sold the RUT Jul 15th 1030 Puts at 5.68 and purchased the RUT Jul 15th 980 Puts for 2.78 and a net credit of 2.90. The dollar risk / reward is a little scary, but do note on the payoff diagram below that RUT needs to drop about 8.44% to reach the short strike of the put spread. This would come on the heels of the 4.7% drop on Friday.