US stocks began the year showing strength and the patter of large cap outperformance that was 2017 continued this past week. The Russell 2000 (RUT) was up 1.6% while the large cap focused Russell 1000 (RUI) put up a 2.51% performance last week.
In the volatility space, the 2017 pattern held up with the Cboe Russell 2000 Volatility Index (RVX) closing each day at a premium to VIX in the mid 40% range. The average premium in 2017 was around 43% so like the large cap outperformance last week, we’ve started with more of the same.
About 20 minutes into the trading year there was a short dated bullish RUT trade that came to the post by the escalators at Cboe. With RUT around 1542 there was a buyer of 100 RUT Jan 12th 1545 Calls at 11.80 who then sold 200 RUT Jan 12th 1595 Calls for 0.55 each. The net cost for each 1 x 2 spread was 10.70 and the payoff as of this coming Friday’s close appears below.
A home run with this trade involves RUT moving all the way up to 1595 which would result in a profit of 39.70 per trade. That’s a big move, and still 35 points higher than where RUT finished the week.