Small cap stocks prevailed last week as the Russell 2000 (RUT) gained over 1% while the Russell 1000 (RUI) was lower by about 1/3 of 1%.  Large cap stocks still hold a lead over small caps in 2017, but the Russell 2000 has kept pace with the Russell 1000 since the end of the first quarter so all the large cap outperformance may be attributed to the first three months of 2017. 

RUT RUI 06092017

On the volatility front VIX and the CBOE Russell 2000 Volatility Index (RVX) rose last week, with the relative move from VIX a little bit better than that of RVX.  As with most of 2017, concerns about small cap stocks continues to remain at high levels relative to that of large cap stocks.

RVX VIX 06092017

Late Friday, as the Russell 2000 was testing all-time highs, a trader came in selling a RUT put spread with a short strike that is about 9.5% lower than where RUT was trading at the time.  With RUT around 1420, they specifically sold RUT Jun 23rd 1285 Puts at 0.71 and purchased RUT 23rd 1250 Puts for 0.46 and a net credit of 0.25.  The risk is substantial, but there’s a big buffer between where RUT was trading and the short strike.  In fact, RUT hasn’t seen 1285 since election week in 2016 so for this trade to fail small cap stocks need to give up all post-election gains in 10 trading days.

RUT PO 06092017

I did a little more digging on this trade using the Skew tool on the LiveVol Pro platform.  Note the green line below, which is higher than the other expirations over the next few weeks.  It is very possible the trader behind this bull put spread noted the elevated implied volatility in the June 23rd options and decided to take advantage of it.  

RUT Skew 06092017