It’s a stretch, but the race to the end of 2017 is shaping up like the most recent World Series that captivated my home town. Early this year the Russell 1000 (RUI) dominated performance, then it looked like the Russell 2000 was going to run away with the out performance crown. Suddenly, a couple of weeks ago, RUI got a second wind and is making a run at RUT. Last week RUI closed the gap a tad losing 1.92% while RUT was down 2.08%. For the year RUT is up 2.43% and RUI is up 2.01% which puts the 1000 within striking distance of RUT.
If you had told me a couple of years ago that I would refer to the Cubs winning a World Series and Donald Trump possibly becoming president in the same blog I would assume the story would involve me making a career change to writing fiction. Although my mother-in-law continues to ask why I can’t write the next Harry Potter, I think I’m sticking with the markets. The election is putting upside pressure on the equity market and has ever since events occurred that pushed the possibility of a Trump victory in the realm of reality. Usually a move in broad based market volatility pushes the RVX / VIX ratio to low levels. This has been the case over the past few trading days, but note on the chart below we have not reached the lowest levels seen in 2016.
Finally, I went searching for a RUT trade to discuss in this space on Friday and the first thing that stood out was a buyer of 100 of the RUT Nov 30th 800 Puts at 0.35. This occurred when RUT was at 1160 which means the small cap benchmark needs to drop over 31% for this put to be in the money at expiration. I cleaned off my glasses, wiped my eyes and then noted that this was part of a spread where the other leg involved selling the RUT Nov 1100 Puts for 11.16. Combined the trade generated a credit of 10.81 and a payoff at the end of this month that resembles the diagram below.
Note there’s a lot of downside and I honestly think they 800 puts was purchased to satisfy a risk manager somewhere. This trade is more like a naked sale of the 1100 puts, which in the current market environment would keep me up at night, but apparently on trader considers this a good idea. Note if RUT doesn’t lose over 5% this trade works out with both options expiring out of the money and a profit equal to the credit of 10.81.