Weekend Review – Russell 2000 Options and Volatility

Large cap stocks held up relative to small caps with the Russell 2000 (RUT) losing 1.30 last week while the Russell 1000 (RUI) was down only 0.77%.  RUT still holds the 2016 lead by a fairly wide margin up 8.86Z% versus up 5.43% for RUI.


Low VIX usually results in a higher RVX / VIX spread.  That contributed to the spread reaching 2016 highs this week, but I have to believe that the RUT underperformance has a part in it as well.


I went searching for a RUT option trade from Thursday that made money based on the market’s reaction to the September Non-Farm Payroll report on Friday.  I found a few successful trades, but came across one that wasn’t the best trade, but maybe the best teaching example.  Late Thursday the 6th, someone sold the RUT Oct 7th 1235 Put for 1.95 and purchased the RUT Oct 7th 1225 Put for 0.65 netting a credit of 1.30.  The payoff as of Friday’s RUT close shows up below.


The reason I like this trade, for a blog example, is because it wasn’t perfect, but still made money.  Note that the short leg of the spread was 0.60 in the money based on Friday’s Russell 2000 close.  This means that the holder of this position had to pay out 0.60, which offset some but not all, of the 1.30 they took in late Thursday, resulting in a profit of 0.70.  The trade turned out fine, but was probably a bit stressful to deal with late Friday.  One thing the holder of this position doesn’t have to worry about on Monday morning is having some sort of long stock or ETF position that resulted from the short put being in the money.  Personally, I think this is a great example of why traders prefer cash settlement.