Small and large cap index finished the week in what I will call a statistical tie up about 0.5%. For the year the Russell 1000 (RUI) is now up over 10% while the Russell 2000 has gained a respectable 5.8% in 2017. We are early in the 3rd quarter of the year, but so far RUI is up 1.98% versus RUT 1.45%.
With VIX so low the CBOE Russell 2000 Volatility (RVX) premium to VIX has popped up a bit. I’m attributing more to low VIX than high small cap volatility. It appears that small caps are poised to play some 2017 catch up, but the conviction of this occurring keeps going down as the RVX / VIX ratio remains high.
An interesting RUT trade hit the post mid-afternoon on Friday. With RUT at about 1434 there was a buyer of 200 RUT Sep 15th 1270 Puts for 3.74 who also sold 300 RUT Sep 15th 1230 Puts for 2.59. The net result was a credit of 0.29 for each 2 x 3 spread. The payoff at RUT September AM settlement appears below.
As long as the Russell 2000 doesn’t drop more than 11.4% this trade results in a profit equal to the 0.29 credit per spread. If the Russell 2000 settles at 1230 this trader will have hit the jackpot with a profit of 80.29 per spread. There is risk and it involves basically a market crash between now and expiration with RUT needing to give up just under 20%.