The Russell 1000 (RUI) was down 3.31% last week and the Russell 2000 (RUT) lost 2.3%. This outperformance (I know it doesn’t feel like outperformance) of small caps leads me to ponder the true concerns of market participants that actually put money to work. The press continues to focus on the Fed’s next move, which will be known in just under two weeks on September 17th. However, small cap stocks, as a group, are more exposed to the domestic economy than large cap stocks. When I see large cap stocks underperform like this I wonder if the actual perceived risk to the market is not within the United States, but forces from outside our borders which we have less control over.
The RVX / VIX premium chart reaffirms this theory as the CBOE Volatility Index (VIX) remains at a discount to the CBOE Russell 2000 Volatility Index (RVX). We have data going back to the first day of 2004 and until August 24th RVX had never closed at a discount to VIX. I honestly expected this to be a short lived phenomena, but the low relative risk perception for small caps versus large cap stocks seems to be sticking.
At least one large trader believes small cap stocks are going to hold up over the next couple of weeks. Late on Friday, when the Russell 2000 was at 1125 there was a seller of a pretty risky put spread. Specifically they sold 3500 RUT Sep 18th 1100 Puts for 19.40 and then also purchased 3500 RUT Sep 18th 900 Puts for 0.70 and a net credit of 18.70. The payoff upon AM settlement on the 18th appears below.
The downside break even on this trade is down 3.9%, but the actual goal is for the Russell 2000 to hold 1100. Do note that the long put does not provide any protection against a drop unless RUT drops 20%. I’m going to assume the purchase of the 900 put has more to do with margin than risk control in this case.