Investors got a slight reprieve from what has been a difficult start to the year as both the Russell 1000 (RUI) and Russell 2000 (RUT) rose last week. RUI gained 1.36% while the small cap focused RUT was up by 1.28%. There has been nowhere to hide in 2016, but large cap stocks have held up pretty well versus small caps. RUI is down just over 7% in 2016 while RUT is down a little more than 10%. The chart below indexes RUI and RUT to 100 as of December 31st 2015 for comparison’s sake.
With Friday's equity market strength VIX moved lower and the CBOE Russell 2000 Volatility Index (RVX) followed suit, but remained at a ‘normal’ premium to VIX. Normal used to mean that RVX was always at a premium to VIX, but last year ten years of what was considered the norm changed as VIX closed over RVX multiple times in 2015.
A late day Friday trade seemed to be worth discussing in this space. With RUT around 1015 there was a spread buying the RUT Feb 980 Put at 14.13, selling the RUT Feb 1010 Put at 23.93, selling the RUT Feb 1050 Call at 10.63, and finally buying the RUT Feb 1100 Call for 1.33 and a net credit of 19.10. Astute readers (or those that peeked at the payoff diagram below) will note this is a broken wing iron condor. I’m sure they happen all the time, but this is the first one I came across in size in RUT option trading in some time.
With RUT down 10% this year I guess it should be expected that a trade like this would want more room for error to the upside and that’s what they have. Break-even to the upside involves a move of over 5% while the downside cushion is under the psychologically significant 1000.00 level and down about 2.4%.