A prescient Barron’s article appearing on Jan. 20,2018,  “Unseen Dangers in Small-Cap Stock Rally”  claimed that Small-caps “as a group, less profitable, more heavily in debt, and more exposed to the threat of rising interest rates than many investors may realize.” may offer a plausible explanation for the recent pullback in the U.S. Small-cap benchmark, Russell 2000 Index.

September Struggles:

After making 23 new record highs the U.S. Small-cap benchmark, the Russell 2000 Index (RUT) reached its peak (1742.09) on Aug. 24, 2018.  At that time, the Russell 2000 (+12.94%) outperformed the S&P 500 (+8.58%).  However investor’s bullish sentiment changed in September.  Investors became more concerned whether the Russell 2000 valuation was warranted as trade tensions escalated between the U.S. and China, Mexico, Canada, etc. and an anticipated rise in interest rates.  As a result, the Russell 2000 Index closed below its 50 day moving average on September 24th.

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Red October:

Four trading days into the 4th Quarter the turbulence in the equity market has accelerated, particularly for the Russell 2000.  The market leadership baton was been passed as the YTD performances diverged with Russell 2000 (+7.25%) and S&P 500 (+8.53%).  Additionally, the bearish sentiment for RUT is growing as the relative 30-day implied volatility levels on the Cboe Russell 2000 Volatility Index (RVX) vs. Cboe S&P 500 Volatility Index (VIX) highlight a greater bearish outlook for Russell 2000 relative to the S&P 500.

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Strategy Spotlight - RUTW Oct.5 1660/1650 Bear Put Spread:

A bearish signal was created when RUT broke through its 50 day moving average on Sept. 24th and has since declined by -3.41% through yesterday’s close on Oct. 4th.    Highlighted below is a comparison in performance of a hypothetical long RUT Put and Bearish Put Spread taking advantage of the price movement from Sept. 24th -0ct. 5th.

In both case during this time period, a hypothetical long put or bearish put spread position potentially offered an opportunity for managing downward price movement or hedge a position with limited risks using an options strategy on the cash-settled Russell 2000 Index (RUTW).
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For additional information please visit the following Cboe webpages:

Russell 2000 Index Options: www.cboe.com/RUT

Cboe Russell 2000 Volatility Index: www.cboe.com/RVX

Cboe Russell 2000 BuyWrite Index: www.cboe.com/BXR

Cboe Russell 2000 30 Delta BuyWrite Index: www.cboe.com/BXRD

Cboe Russell 2000 PutWrite Index: www.cboe.com/PUTR

Cboe Russell 2000 Zero Cost Put Collar Spread: www.cboe.com/CLLR