The Russell 2000 (RUT) was up by 0.57% last week while the large cap focused Russell 1000 (RUI) gained only 0.23%. For the year RUT is now up 4.25% while RUI has gained 8.84% as large cap stocks continue to dominate 2017 after the huge outperformance of small cap stocks from election day to the end of 2016.
On Monday RVX closed below 14.00 for the first time in years. Finishing the day at 13.89 was also a 2017 low for RVX (kind of makes sense if we haven't been below 14.00 for years...). However, this is a bit more interesting when VIX is not also making headlines with a new multiyear low. This shows up in the RVX / VIX chart below with the RVX premium in the middle of the range for 2017. Of course, getting a read at such low levels is tough in the volatility space, but it seems that RVX moving lower independently of VIX may be an early sign that the small cap stock underperformance is coming to an end.
With about an hour left in the trading week and the Russell 2000 at 1413.35 a trader came in with a bear call spread that will expire this coming Friday. The trader sold 1262 of the RUT Jun 30th 1425 Calls for 4.35 and then purchased 1262 RUT Jun 30th 1470 Calls for 0.35 taking in a credit of 4.00. The payoff if held through this coming Friday appears below.
The risk for this trade, if RUT takes off to the upside next week is pretty daunting relative to the reward with a 4.00 credit versus a potential loss of 41.00 with RUT over 1470.00.