Weekend Review – Russell 2000 Options and Volatility – 8/29 – 9/2

I went to the horse track for the first time in about a decade just before writing this blog.  In one race, a horse (not mine of course) steadily pulled away into the finish of a race.  That’s sort of what is happening with the Russell 2000 (RUT) performance relative to the large cap focused Russell 1000 (RUI). RUT gained almost twice as much at RUI last week (1.19% versus 0.62%).  This places RUT up 10.21% for 2016 and RUI up only 6.81%.


VIX finished the week under 12.00 and the CBOE Russell 2000 Volatility Index (RVX) lost value as well, but held up relative to VIX.  The relative spread rose a bit but is lower than the over 40% range we saw earlier this year.


During the first half hour of trading on Friday a trader executed a ratio spread in the Russell 2000 market.  The spread used RUT Weeklys that expire on Friday October 14th.  At the time RUT was trading around 1246 and the trader purchased 1 RUT Oct 14th 1270 Call at 13.38 and then sold 2 RUT Oct 14th 1290 Calls at 6.29 each for a net cost of 0.80.


Note on the payout diagram above, which of course assumes this trade is held to expiration, that the maximum payout occurs at 1290.00.  That got me looking at recent RUT history and low and behold the RUT high about 14 months ago was 1294.  I have no idea if that is what the trader was thinking, but RUT around 1290 in mid-October would make this trader very happy.