Weekend Review – Russell 2000 Options and Volatility – 10/10 – 10/14

The finish line for 2016 performance is starting to appear in the distance. It was starting to look like small cap stocks would rule the year, but in the past couple of weeks, large cap stocks have started to play a little catch up. Last week the Russell 2000 (RUT) dropped just over 2% while the Russell 1000 (RUI) was down just over 1%. The spread is narrowing with RUT maintaining about a 2.4% lead going into the final stretch that is 2016.


When volatility moves up in the form of a higher VIX and elevated CBOE Russell 2000 Volatility Index (RVX) we usually see a drop in the RVX / VIX premium. That’s what happened last week, but the drop was to a level that is still pretty close to the 2016 average. The point, we have more room to drop.


RUT finished the day lower on Friday, but did not break Thursday’s lows to the relief of at least one trader. Early Thursday, with RUT just under 1210 someone came in and sold 50 RUT Oct 14th 1200 Puts for 3.41 and purchased 50 RUT Oct 14th 1195 Puts for 2.26 and a net credit of 1.15. As we know and can see on the payoff diagram below, RUT managed to stay well above 1200 on Friday which resulted in both puts expiring out of the money and the seller of this put spread pocketing a profit of 1.15 x 50 x 100. Not bad for a one-day trade…