Weekend Review – Russell 2000 Options and Volatility – 8/15 – 8/19

Sometimes I over personify the financial markets and when I saw that the Russell 2000 (RUT) easily extended the lead over the Russell 1000 (RUI) this week an Olympic themed situation popped into my head.  I saw the Russell 2000 as Usain Bolt giving a thumbs up as it easily moved farther ahead of the Russell 1000.  For the week RUT gained 0.60% while RUI was actually down by 0.01% which places the 2016 lead for RUT at just over 2% (8.88% vs. 6.86%).

RUT RUI Performance

When VIX is low the ratio created by dividing the Russell 2000 Volatility Index (RVX) by VIX tends to gravitate to higher levels.  That’s now been the case for a few weeks as the ratio depicted below has hovered around the 35% level.


The last big Russell 2000 Index option trade for the week is the one I want to talk about in this space.  On Friday at two fifty-nine and forty-five seconds Chicago time a trader sold 100 RUT Aug 26th 1230 Calls for 11.92 and then paid 5.88 for 100 of the RUT Aug 26th 1240 Calls which resulted in a credit of 6.04 and a payoff that looks like the diagram below.


A slight down week results in a profit of 6.04 (equal to the credit received) which a run to the upside will mean losses capped at 3.96.  That’s a pretty nice risk / reward for someone that may have a slightly bearish outlook for the markets next week.