Large cap stocks gained and small cap stocks were lower last week with the Russell 1000 (RUI) moving up by 0.77% while the Russell 2000 (RUT) dropped 0.26%. For the year RUI is down 1.25% and RUT has given up 3.52%.
The implied volatility differential finished the week with the CBOE Russell 2000 Volatility Index (RVX) at about a 20% premium to VIX which is pretty close to the average level for this year. For the moment the risk perception for small cap stocks is at levels normally seen in a low volatility market environment.
A couple of trades from Friday caught my eye in the Russell 2000 Index option arena. The first is based on a fairly neutral outlook for RUT between now and standard November settlement. With RUT at 1155.67 a trader came in and sold the RUT Nov 20th 1160 Puts for 26.47 and the RUT Nov 20th 1160 Calls for 22.63 and a net credit of 49.10. For this trade to turn a profit RUT settlement on the open of trading November 20th needs to fall between 1110.90 (a drop of 4.0%) or 1209.10 (a gain of 4.6%).
The second trade was a little more dynamic and has a bit more specific outlook as far as timing goes. With RUT at 1158.96 a trader came in selling the RUT Nov 20th 1140 Puts at 18.35 and then buying the RUT Dec 19th 1140 Puts for 29.05 and a net cost of 10.70. My assumption is that this trader expects the market to sell off toward the end of the year. I also find it interesting that the long leg of this trade expires just after the final FOMC meeting of 2015. That may just be playing into the analysis behind this calendar spread.