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%).
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.