Small cap stocks seem to love the outcome of the election.  Since the market close on election-day the Russell 2000 (RUT) is up over 12% while the Russell 1000 (RUI) has gained just over 3%.  The 10% lead that RUT has on RUI has just about all come from the post-election rally for small caps.

rut-rui-ytd

 

The CBOE Russell 2000 Volatility Index (RVX) over VIX premium finished just under 47% this past week.  This is the second highest level for 2016.  A combination of higher RVX and lower VIX took us to this extreme level.  I decided to see what happened to the equity markets after the RVX / VIX premium reached the 2016 high back on October 6th.  On that date RUT was at 1246 about one month later RUT was about 80 points lower.

rvx-vix

On Monday I came across what, at the time, appeared to be a pretty aggressive trade executed in the Russell 2000 pit.  With RUT at 1321 there was a buyer of 300 of the RUT Nov 25th 1315 Calls for 12.60.  Keep in mind at this point RUT had rallied about 10.5% since election-day.  However, as we know now the rally continued through the end of the week with RUT finishing Friday at 1347.20.  The payout diagram below shows the outcome for this trade if our trader decided not to exit before Friday’s close.

rut-po