Small cap stocks continue to take it on the chin as the Russell 2000 (RUT) dropped almost 5% (4.81% for the quants) last week while the Russell 1000 (RUI) was down 3.16%. I love how I am conditioned to a 3% drop in a broad based index feeling kind of normal. My how times have changed.
In times of panic the implied volatility of S&P 500 (SPX) options often elevates compared to the implied volatility of RUT index options. That has not been the case in 2016 and in fact VIX closed at the biggest discount relative to RVX in almost two months this past week. I see dual reasons, complacency despite equity market weakness and more concern about small caps than large caps.
I went fishing for trading examples this past week and focused a bit on Thursday since the employment number came out Friday. Another out of the money put spread seller showed up at the RUT post on Thursday when the Russell 2000 was trading around 1009. In a couple of different transactions there was a seller of the RUT Feb 19th 950 Puts for 4.00 who purchased the RUT Feb 19th 850 Puts for 0.30 and a net credit of 3.70. For full disclosure these numbers are round estimates as the trade was executed over the course of time and at different prices.
Note the downside cushion, based on RUT at the time is over 6%, therefore as long as the Russell 2000, which was already down over 10% on the year does not give up another 6% in two weeks this trade turns out fine. However the market action on Friday places RUT closer to the all-important 950 level for this trade.