Talk of the Fed raising rates after the June 16 – 17 two-day meeting that is looming has been heating up. If those that control such things are seeing pockets of growth in the US economy and consider it safe to raise rates, then growth must be back in fashion right? Well, that’s how the Russell 2000 (RUT) acted last week relative to the Russell 1000 (RUI) with the small cap benchmark rising a little more than 0.5% more than the Russell 1000 gained. RUT is still down on the year, but made some baby steps toward turning the year to date from red to green.
The Russell 2000 Volatility Index (RVX) has been at a significant premium to VIX more often than not over the past few weeks. The RVX premium did finish near the low end of that range on Friday which could be considered a confirmation that growth concerns are dissipating a bit.
Early Wednesday, like during the first 10 minutes of trading, there were two different trades that seem to have sort of the same outlook. First, less than a minute after the open, with RUT hanging around 1097 someone sold the RUT May 31st 1030 Puts for 1.64 and then went down one strike to buy the RUT May 31st 1025 Puts for 1.44 and a net credit of 0.20. About five minutes later, with RUT still around 1097 someone had a similar idea and sold the RUT May 31st 1040 Puts for 2.35 and purchased the RUT May 31st 1035 Puts at 1.75 for a net credit of 0.60.
Both trades focus on what is going to happen over the course of the month of May and both do fine if RUT manages not to drop significantly.
Note the 1030 / 1025 put spread has more than a 6% cushion against a drop in RUT while the 1040 / 1030 spread is good as long at RUT doesn’t drop more a bit more than 5%. The risk / reward reflects this different a bit as well with the potential gain for the 1030 / 1025 spread at 0.20 with a potential loss of 4.80 while the 1040 / 1030 spread could profit 0.60 while the loss would be 9.40 if RUT finishes the month below 1030.