With only one week behind us it is tough to show year to date charts for the Russell 1000 (RUI) and Russell 2000 (RUT). I’ll just note that the bad week was broad based with RUI losing 6.04% and RUT dropping a whopping 7.90%. The Russell 2000 drop is particularly noteworthy since it out did the late August one week drop by over 2%. Small cap stocks had a tough 2015 and the underperformance has extended into the first week of 2016.
On the trading front I noticed a big IWM trade that I felt was more suited for the RUT market. I’m here to observe and not pass judgement, but early Friday when IWM was at 104.83 there was a seller of 8000 IWM Mar 106 Puts for 4.95 who purchased 8000 of the IWM Mar 98 Puts for 2.18 for a net credit of 2.77. This trade occurred while IWM was trading at 104.83. The payout at March expiration appears below.
My question is why not do the same trade with an 800 lot in RUT options? The overall risk / reward would be the same and the commission would probably be a bit lower. Also, RUT options are cash settled whereas the IWM options could end up taking delivery of shares of the IWM ETF. One argument could be a preference for PM versus AM settlement, but that argument will be going away as more PM settled RUT options are on the horizon. I will refer to Rick Rosenthal’s recent blog discussing this pending development –
Russell 2000 Index Options (RUT) - "Weeklys" New PM-Settled Expirations