The year ended appropriately with the Russell 2000 (RUT) dropping a little more than the Russell 1000 (RUI). RUT was down 0.48% while the large cap focused RUI lost 0.33%. For the year large cap stocks dominated small cap stocks with RUI up over 19% and RUT lagging by over 6% rising just a bit more than 13%.
On the volatility front the Cboe Russell 2000 Volatility Index (RVX) premium to VIX dropped to finish the year very close to the long term average of around 35%.
I’ve started updating charts for the end of the year (thank goodness for the long weekend) and added a RVX to VIX premium chart to the rotation. The chart below shows the high, low, and average RVX to VIX premium by year. I was surprised the see how high the average was back in the middle of the previous decade (I never know what to call the period from 2000 to 2009). This past year was the highest average since 2006. I’ve got more work to do on this and plan on putting together a comprehensive look at small versus large cap performance based on the RVX to VIX relationship.
Late Thursday, with RUT at 1547, a trade arrived at the RUT post that is expecting the Russell 2000 to fall within a range on February 9th. An iron condor was constructed with the RUT Feb 9th 1480 Put being sold at 9.29 and the RUT Feb 9th 1610 Call was sold for 4.54. The wings were purchased at 10 point strike intervals on both the up and downside. The RUT Feb 9th 1470 Puts were purchased at 8.16 and the RUT Feb 9th 1620 Calls were bought for 3.27. The net result is a credit of 2.40. The payout based on RUT prices on the close February 9th appears below.
RUT dropped Friday about 0.9% so the dynamics have changed a bit since this trade was put on Thursday afternoon, but based on the pricing at the time there was a 4.5% cushion to the short put strike and just under a 4.1% cushion between the RUT price and the upper short strike price.