Large cap stocks held up better than small caps last week and the Russell 1000 (RUI) is now outperforming the Russell 2000 (RUT) by just about 1.00% for the third quarter. I had high hopes for small cap stocks in the second half of 2017, but those hopes are starting to fade.
The CBOE Russell 2000 (RVX) premium to VIX topped 50% for the first time since early June. My excuse for the higher RVX to VIX relationship has been blamed on VIX, but with VIX rising a bit next week I have to question the market’s outlook for small cap stocks.
The Russell 2000 topped out for the week mid-day Tuesday. A very well-timed trade that expired on Friday was executed with RUT very close to 1450.00. The trader sold 100 RUT Jul 28th 1440 Calls at 10.29, purchased 100 of the RUT Jul 28th 1450 Calls for 4.36 and then also purchased 100 of the RUT Jul 28th 1465 Calls for 0.78 resulting in a net credit of 5.15 and a payoff on the close Friday that appears below.
This trade was executed before the FOMC, which has generally been bullish for the stock market. That wasn’t the result this week, but a big move either way benefited this trade and if held to Friday’s close this trader pocketed the 5.15 credit taken in on Tuesday.