An emerging theme in 2017 is that when stocks come under pressure the Russell 2000 (RUT) seems to take it on the chin a bit more than the Russell 1000 (RUI). Last week the large cap focused RUI was lower by 0.33% while RUT lost just over 1.5%. This widens the lead that RUI has on RUT to about 4.5% for 2017.
With small caps leading stocks lower the relative level of small cap volatility remains high compared to large cap volatility. The best way to measure this is the CBOE Russell 2000 Volatility Index (RVX) premium to VIX which has been elevated for most of 2017 compared to other years.
The highest level reached by RUT last week was just over 1380 early Wednesday morning. Two seconds in to the trading day a bearish spread was executed at the RUT post. Specifically, 125 RUT Apr 7th 1400 Calls were sold at 0.73 while 125 of the RUT Apr 7th 1425 Calls were purchased for 0.25 and a net credit of 0.48. The payout diagram below shows the outcome as of Friday’s close for the Russell 2000.
Note that RUT finished the week in a very safe place of this trade at 1364.56. The break-even based on where RUT was when the trade went off involved a move up by about 1.45%. A quick run to 1425 or above would have been nothing short of a disaster for this trade.