Small and large cap stocks finished week in what I will call a statistical tie performance wise. The Russell 1000 (RUI) gained 0.02% while the Russell 2000 (RUT) was up 0.03%. If this were an election RUI supporters would be calling for a recount. I’m pretty convinced RUT is poised for a period of catching up to RUI and I looked smart on Monday as RUT gained 0.80% to RUI’s 0.25% rise, but with an increase in market volatility RUT fell back in line with RUI.
The CBOE Russell 2000 Volatility Index (RVX) to VIX premium has average about 45% in 2017 which is historically high. However, since mid-June this reading has consistently been closer to 40%. This reduction in the relative level of volatility expectations for small cap stocks relative to large cap stocks has me thinking it’s time for some small cap outperformance.
Thursday was a nervous day for the stock market and small caps were participating in the nervousness. RUT finished the day at 1400.81, down about 1.3% on the day. One trader decided this was enough and stepped up selling a bull put spread that has already expired. They sold the RUT Jul 7th 1395 Puts at 2.69 and then bought the RUT Jul 7th 1385 Puts for 1.04 which results in a net credit of 1.65. This trade was never in danger or turning into a loss as the stock market reacted favorably to the June employment report and RUT gained about a good part of the Thursday losses to finish the week at 1415.84.