Weekend Review – Russell 2000 Options and Volatility – 8/8 – 8/12

The race between large cap and small cap stocks came down to a photo finish last week as the Russell 1000 (RUI) was up 0.06% while the Russell 2000 (RUT) ended up losing 0.13%.  This slight win for RUI didn’t do much as far as the year to date performance comparison goes as RUT is still ahead of RUI by 1.4% as RUT is up 8.27% in 2016 while RUI is up only 6.87%.

RUT RUI

The CBOE Russell 2000 Volatility Index (RVX) was lower last week while VIX gained a little.  The result when a numerator drops and the denominator rises is a smaller number and that’s what happened to the RVX / VIX relationship.  However, note below that the RVX / VIX ratio is still near the highs for 2016.  There’s still a high risk perception for small cap stocks, regardless of what they’ve done since the lows in February.

RVX VIX Chart

As soon as the bell rang today I found the kind of trade I wanted to highlight this weekend in the form of an out of the money bear call spread.  When we make new highs (like on Thursday) in the Russell 2000 these trades seem to show up.  With RUT around 1228 a trader took in a 0.10 credit by selling the RUT Aug 19th 1270 Call for 0.17 and then purchasing the RUT Aug 19th 1280 Call for 0.07.  The danger is a bull run of 3.4% or more next week for this trade which is not out of the question, but with no catalysts in sight this may be a safe bet.  We will see by next Friday if risking 9.90 to make 0.10 was worth it.

RUT PO