Large cap stocks turned on the afterburners Friday with the Russell 1000 (RUI) rallying over 2% last week while the Russell 2000 (RUT) was up only 0.65%. 2017 was a year of consistent large cap outperformance and so far this year the theme has continued.
On the volatility front small cap volatility rose with the Russell 2000 underperformance as RVX gained over 8%. VIX actually dropped a little last week, with the result being a rise in the RVX to VIX relationship.
About 10 minutes into the trading week, with RUT around 1597, a familiar trade was once again executed in the form of an out of the money put spread. A trader sold the RUT Jan 26th 1580 Puts for 4.80 and purchased the RUT Jan 26th 1575 Puts for 3.85 taking in a credit of 0.95. The risk this trade would involve a move to 1575 which, if held through expiration, would have resulted in a loss of 4.05.
This trade was never in danger of turning into a loser as the Russell 2000 worked higher through the early part of the week and then did take a turn to the downside, but was always more than ten points higher than the short strike on this bull put spread.