Weekend Review – Russell 2000 Options and Volatility – 8/1 – 8/5

Last night we were (somewhat) entertained by the opening ceremonies for the Summer Olympics and for the next 17 days will be subjected to story enhanced competitions.  I have been monitoring a competitive struggle already this year.  The battle between small cap and large cap stocks.  It has been like a marathon with the Russell 2000 (RUT) falling way back, but pacing itself relative to the Russell 1000 (RUI).  RUI had quite a lead after the first six weeks or so of 2016.  However, since February RUT has held a stronger pace (up almost 30% from 2016 lows) than RUI and has now taken the lead.  We will see if the underdog representative of small cap stocks everywhere will be able to maintain its lead through the end of the year or will the better capitalized Russell 1000 rebound and take the performance prize for 2016.

RUI RUT

With VIX at such low levels the relative relationship between large cap volatility and small cap implied volatility has been very high this summer.  The ratio between the CBOE Russell 2000 Volatility Index and VIX hovered around 40% all week last week.

VIX RVX Ratio

Friday, as the Russell 2000 climbed to 2016 highs on trader stepped up and put on a bull put spread that expects RUT to remain at relatively high levels.  With the index at 1232 a trader sold the RUT Aug 12th 1220 Put for 3.80 and purchased the RUT Aug 12th 1210 Put for 2.00 and a net credit of 1.80.  As long as the Russell 2000 doesn’t give back about 11 points next this trader will realize a return equal to the 1.80 credit.

RUT PO