Last week the Russell 2000 (RUT) beat the Russell 1000 (RUI) down like a college football team trying to make a statement and qualify for a spot in the playoff. RUT was up over 10% in reaction to the outcome of the US election while the large cap (and more internationally focused) RUI gained just under 4%. The race to the end of the year was close, but now RUT has about a 7% lead on RUI.
In an interesting twist, the CBOE Russell 2000 Volatility Index (RVX) moved up relative to VIX despite the outperformance of small cap stocks. This is more of a function of VIX getting crushed after being elevated as the election was somewhat of a macro-economic event and the anticipation of things like that result in VIX moving up as there is increased demand for S&P 500 index options.
Finally, here’s a trade that is stepping in front of the excitement for small cap stocks. With minutes to go in the week there was a spread that appears to be looking for a stalling out of the RUT move just a few points higher than last week’s close. With RUT at 1283.58 a trader entered a spread that purchased 1 RUT Nov 18th 1270 Call at 20.34, sold 3 RUT Nov 18th 1290 Calls for 8.70 each, and then rounded things out by purchasing 2 RUT Nov 18th 1310 Calls at 2.64 each for a net credit of 0.48. The payoff at Nov 18th AM settlement pricing appears in the diagram below.
Note the best scenario is for a close at 1290.00. At about 1300.00 things start to turn from good to bad for this spread with losses being capped at 19.52 with RUT at 1310.00 or higher. Finally, if the market completely turns around next week and RUT finishes under 1270.00 all options expire out of the money and the trader pockets the 0.48 credit.