Small caps played a little catch up with large cap stocks last week with the Russell 2000 (RUT) gaining over 2% while the Russell 1000 (RUI) was up about 1.5%. For the year RUI has a lead of just under 0.5%.
The Cboe Russell 2000 Volatility Index (RVX) to VIX premium was at historically high levels for most of 2017 averaging around 44%. As small caps outperformed last week this premium started to come under a bit of pressure, but it still remains at pretty elevated levels.
Late Thursday one trader used RUT options to trade a one-day outlook for small cap stocks. With RUT around 1586 they purchased the RUT Jan 12th 1580 Calls for 9.18 and sold the RUT Jan 12th 1590 Calls for 3.00 resulting in a net cost of 6.18. They had a defined risk / reward with a potential gain of 3.82 if RUT finished the week over 1590 and a loss of 6.18 if the market took a dive and finished the week under 1580.
We all know the outcome with RUT finishing the week strong and this trade, if held through the close Friday, resulting in a profit of 3.82.