Small caps continue to lag as the Russell 2000 (RUT) was up 0.46% last week while the Russell 1000 (RUI) gained 0.87%. The RUT was making quite a run in the end of the third quarter, but that move has come to an abrupt halt with RUI up about 1% more than RUT in October.
Small cap bulls (or relative bulls) make have a little hope from what shows up in the chart below. Despite the RUT underperformance, RVX dropped relative to VIX last week. We saw similar price action in response to the late September bull move for RUT so small caps may be worth keeping an extra eye on next week.
It's been a while since I highlighted an out of the money RUT put spread in this space. Due to the consistently higher volatility for RUT options compared to SPX options, traders find opportunities to take in premium using spreads that are very far out of the money. Of course, there is a risk associated with these trades, but the move required to experience a loss is usually pretty dramatic.
Thursday morning, when RUT was around 1492, there was a seller of the RUT Dec 1st 1380 Puts at 4.68, who then purchased the RUT Dec 1st 1370 puts for 4.18 and a net credit of 0.50. The payoff on the close December 1st shows up below.
Note a drop of 7.5% is needed to hit the short strike, while the worst-case scenario is not encountered unless the Russell 2000 was down 8.2% from where it was trading Thursday morning. Since RUT finished the week much higher the cushion this trade has is even wider now.