Just when small cap stocks appeared to be making a move to narrow the gap in performance between the Russell 2000 (RUT) and the Russell 1000 (RUI) things have fallen apart with RUT losing 2.65% which places RUT slightly in the red for 2017.  RUI was under pressure as well losing 1.50%, but this index does remain in the positive by 4.50% year to date. 

RUT RUI Performance 325

The spread between the Russell 2000 Volatility Index (RVX) and VIX reached the lowest level of the year when RUT started to make a bullish move two weeks ago.  With the end of that short-lived run came a move higher in the RVX to VIX premium. 

RVX VIX 325

Wednesday was the darkest of days for the Russell 2000 with RUT finishing the day near 1345.  Just before the final print one sort of daring soul came into the RUT post and sold an out of the money put spread expiring on the close next Friday March 31st.  I say they are sort of daring because there is a lot of room for error on this trade as the RUT Mar 31st 1235 Puts were sold for 0.87 and RUT Mar 31st 1200 Puts were purchased for 0.56 and a net credit of 0.31.  The payoff on the close next Friday appears below.

RUT PO 325

Note there’s over an 8% cushion for being wrong based on Wednesday’s close.  This is about nine points lower than where we finished the week so the trader behind this out of the money put spread is probably feeling pretty good about this trade.  Finally, it would take over a 10% move to the downside from Wednesday’s close for this trade to result in the disastrous maximum potential loss of 34.69.