With Greece finally behind us (for now…) the global economic picture is a bit more stable. This resulted in equity markets rebounding last week. Large caps benefited from the resolution of the Euro issues and the Russell 1000 (RUI) gained 2.24% placing the large cap benchmark up 3.59% for the year. Small cap stocks were higher as well, but the Russell 2000 lagged gaining 1.20%.   There is still a bit of a spread between small cap and large cap performance for 2015 as the RUT is up 5.18% year to date.


The CBOE Russell 2000 Volatility Index (RVX) and CBOE Volatiltiy Index (VIX) were both dramatically lower last week. RVX lost 25.4% and VIX was down by 29%. What we focus on here is the RVX – VIX relationship. This is displayed below and note that small cap risk relative to large cap risk, as measured by the percent premium of RVX relative to VIX is at 21.00% which it the highest level in over a month.


Late Thursday with the Russell 2000 at 1272.89 a trade came into the Russell 2000 post at CBOE that appears to be looking for a grind lower into October that sold a near dated option to help pay for the October put. There was a buyer of the RUT Oct 1130 Puts at 9.50 who also sold the RUT Aug 1160 Puts for 2.60 and a net cost of 6.90. The approximate payoff at August expiration appears below.


The best case scenario is for August Russell 2000 settlement to land right at 1160. In this case the long October 1130 Put would be worth about 25.00 which places an unrealized profit around 18.10. If the Russell 2000 overshoots 1160 by about 35 points then things can get a bit hairy. I estimate as long as the Russell 2000 is not down more than 12.8%, but does move lower then this trade will be looking good. What the trader’s plan is for the October put after August expiration is a tough guess, however I always take a look at taking in more premium when an option has two months left to expiration.