Large cap dominance continued last week as the Russell 1000 (RUI) gained 1.41% last week outdoing the Russell 2000 (RUT) performance of 1.09%. For the year RUI is just a little under 6% ahead of RUT.
With VIX finishing the week below 10.00 the CBOE Russell 2000 Volatility Index (RVX) level relative to VIX is at high levels. That is really more of a function of low volatility across the board, but continued underperformance of small caps is probably a contributing factor as well.
Since I have extra time this weekend I decided to talk about two RUT trades from last week. One is a bull spread and the other a bearish spread, they were both initiated on Monday morning using options that expired Friday on the close and they were both successful. First the bullish trade.
A little over an hour into the trading day on Monday a RUT bull put spread was put on with the Russell 2000 hovering around 1370. The RUT May 26th 1345 Puts were sold for 2.33 and the RUT May 26th 1300 Puts were purchased for 0.42 resulting in a net credit of 1.91 and a payoff on the Friday close that looks like the diagram below.
Note the closing price for the Russell 2000 from Friday is included above which shows that the small cap benchmark finished safely in the area of profitability. The left side of the payoff diagram is a bit scary looking with a risk of just over 43.00. However, a drop of just over 5% would have been required for this worst-case scenario to come true.
The second trade was a bearish one that also use RUT options that just expired. Again, the Russell 2000 was right around 1370 when someone sold the RUT May 26th 1395 Calls for 0.95 and then purchased the RUT May 26th 1400 Calls for 0.62 and a net credit of 0.33. The payoff diagram for this trade shows up below.
Things finished well for this trade, but the trader behind this one was probably paying a little more attention to RUT on Friday than the first trade since a burst to the upside would have taken this trade from being a profit to a loss.