Stocks had a great week last week with the Russell 2000 (RUT) gaining over 4% and Russell 1000 (RUI) rising about 3.5%. For the year RUT is up 4.01% while RUI is up 4.16%. As you can see below small caps took the 2018 performance lead for a day last week. The magnitude of the gain of over 4% for RUT this week is becoming commonplace. Four of the nine weekly moves for RUT in 2018 have been outside of +/- 3% while there were no moves greater than +/-3% in 2017. Welcome to a higher volatility regime.
The Cboe Russell 2000 Volatility Index (RVX) premium to VIX continues to work higher. The long term average is still a long way off, but the spread at 13% is the type of level we have become accustomed to over time.
Now that RVX has recovered to a decent premium relative to VIX we see a few more out of the money credit spreads popping up. On Friday, with RUT at the closing level of 1597.14, someone came in and sold the RUT Mar 23rd 1455 Puts for 0.78 and bought the RUT Mar 23rd 1420 Puts for 0.58 taking in a net credit of 0.20. Here’s the payoff on the close (these are weeklys and settle on the close) if held to March 23rd.
The dollar reward (0.20) versus risk (34.80) is a bit precarious, but note that the short strike is 8.8% lower than where the market finished on Friday. We haven’t had a two week drop of that magnitude since January 2016 and of the 1590 two-week observations going back to 1987 it has occurred 34 times (2.1%). I assume this trade is playing those odds along with even more insight. Also, I assume the plan is to exit if 1455 starts to look like a reality.