Weekend Review of Russell 2000 Options and Volatility 1/3 – 1/6

The year started out in a similar fashion to the way it ended in 2016 with the Russell 2000 (RUT) out-performing the Russell 1000 (RUI) after the first two trading days of 2017.  However, the first week of the new year ended with RUI putting up some strong numbers and RUT even losing value on Friday while RUI was higher on the day.

I included the last six months of 2016 on the chart below to give some perspective on the relative premium of the CBOE Russell 2000 Volatility Index (RVX) to VIX.  The 50% premium is a rarity and we got to that point late Friday based on a couple of factors, specifically RUT down on the day and VIX at very low levels.

Finally, a trade from last week from beginning to end that was a nail biter.  Mid-morning on Tuesday, with RUT around 1356, there was a seller of a call spread that didn’t expect the strength of small cap stocks from 2016 to continue into early 2017.  They sold 120 RUT Jan 6th 1365 Calls at 6.60 and then went up 15 points and purchased 120 RUT Jan 6th 1380 Calls for 2.00 resulting in a net credit of 4.60.  The payoff if held through this past Friday appears below.

RUT closed well over the short strike of 1380 earlier this past week before moving down to more reasonable levels (at least for this particular trader’s outlook).  I searched for an exit trade of the same size or something that may have been a rolling transaction and came up empty.  Operating under the assumption that this position was held through the close on Friday the net result would have been a profit of 2.32 as the short 1365 Call finished Friday 2.28 in the money.