Large cap stocks had a solid week with the Russell 1000 (RUI) gaining 0.34% while small cap stocks were down by just over 1% as measured by the Russell 2000 (RUT). RUT is now up just over 12% while RUI has had quite a year gaining over 18% for 2017.
The Cboe Russell 2000 Volatility Index (RVX) remained as very elevated levels when compared to VIX as the market is pricing in a little more risk for small cap stocks relative to large cap stocks.
One trader decided the Russell 2000 will rally into the end of the year, but not pass 1575, then the first week of 2018 will see a move beyond this price point. That may not be exactly what they were thinking when the sold 50 of the RUT Dec 29th 1575 Calls for 3.45 and then purchased 50 of the RUT Dec 29th 1575 Calls at 5.05 for a net cost of 1.60. The payoff at Dec 29th expiration appears below.
Of course if RUT overshoots 1575 it’ll be fine, but the best case scenario at the Dec 29th close involves RUT at 1575. And as mentioned before if the Jan 5th call is held after the short leg of this trade expires a rally to start off 2018 would benefit this trade even more.