The recent dominance of small cap stocks came to an end as the Russell 2000 (RUT) dropped just over 0.5% while the Russell 1000 (RUI) gained 0.13%. That places RUI at a performance advantage of just over 3.25% for 2017.
The volatility indexes based on large cap (VIX) and small cap indexes (Russell 2000 Volatility Index – RVX) reflect the extra risk that showed up in the underperformance of RUT. Note the spike down in mid-September on the chart below that was followed by RUT narrowing the RUI lead over the course of a couple of weeks. It may just be that another run for RUT will be preceded or accompanied by a similar move in the RVX / VIX relationship.
Monday, as the week kicked off, with RUT around 1510, someone came in targeting a lower and very specific level for RUT on October 27th. They created a butterfly using RUT put options by buying the RUT Oct 27th 1420 Put for 1.84, selling the RUT Oct 27th 1440 Put for 2.61 and the RUT Oct 27th 1460 Put for 4.06 and then buying the RUT Oct 27th 1480 Put for 6.43 which results in a net cost of 1.60.
The goal is for RUT to land between 1440 and 1460 on Friday October 27th which will result in the spread cost of 1.60 turning into a profit of 18.40. Of course this outcome is based on a pretty specific forecast, but a slight pull back in small cap stocks to end October could result in a nice outcome for this trade.