The Russell 2000 (RUT) experienced a small shining moment to celebrate the first week of March Madness. For the first time in recent memory RUT has the year to date performance lead over the large cap focused Russell 1000 (RUI). This lead was created by small caps holding up better than large cap stocks last week as RUT dropped 0.69% and RUI was down over 1%.
The Russell 2000 Volatility Index (RVX) versus VIX relationship spent some time in uncharted territory for a while this year. RVX finished the week at a slight premium to VIX, which is usually attributed to a rally in VIX. This time around it may be more about the stronger performance of RUT last week.
The daily high for RUT on Monday and Tuesday was over 1600. A level not reached since late January. On Tuesday morning with RUT around 1608 a trader came in a purchased the RUT Apr 30th 1460 Puts for 6.05 and sold the RUT Apr 30th 1390 Puts for 3.35 paying 2.70 for this far out of the money put spread. The payoff on the last day of April shows up below.
Note I’ve highlighted the downside break-even at down 9.3% and put spread maximum profit capped out if RUT loses 13.5% from the time of the trade. The spread cost 2.70, but can result in a payoff of 67.30 if we experience a substantial drop in small cap stocks over the next few weeks.