Weekend Review – Russell 2000 Options and Volatility – 7/5/2016 – 7/8/2016

On Thursday there was a trending hashtag on Twitter #ThursdayThoughts or something like that.  I was tempted to tweet something like “Buy on any weakness #ThursdayThoughts” but was afraid CBOE wouldn’t find the humor in something that looks like a recommendation.  However, if I had done so I would have looked darn good on Friday.  The tide took all ships higher with RUT gaining 2.4% on the day and RUI up 1.5%.  The Friday rally helped place RUT up 3.65% for the year while RUI maintained a lead for 2016 at up 4.18%.

RUT RUI

I was distracted with other duties last week so I didn’t pay as much attention to the RVX / VIX premium as I normally do.  I was checking numbers when I put the chart below together to assure accuracy.  Friday’s close of 39.85% was the highest level for 2016 which means even with small cap stocks performing strongly relative to large cap stocks traders see more risk in small caps.  I find this especially interesting since we embark on earnings season beginning next week.

RVX VIX

Finally, let’s take a look at a trader that sort of got the big move on Friday right.  On Thursday, with RUT around 1148.00 someone bought the RUT Jul 8th 1155 Calls for 3.05 and then sold the Jul 8th 1165 Calls for 0.80 and a net cost of 2.15.  The payoff on the close yesterday appears below.

RUT PO - Updated

Note I marked where RUT was when the trade was done and where RUT was on the close yesterday on this chart.  This was a great trade, where 2.15 turned into a profit of 7.85.  Remember above I said this was sort of a great trade.  The perfect trade would have been just buying the call and not capping their potential profits, but RUT option implied volatility is pretty high these days so spreads make sense.  Also, I think 99% of readers would have been happy to be behind this trade and would not be second guessing themselves after the result.