It was a quiet week for the markets with a lack of economic data, the earnings calendar being light (that changes next week) and our president elect speaking to the press but not making statements to impact the equity markets too much. The result was a 0.35% gain for the Russell 2000 (RUT) and a drop of 0.04% for large cap stocks as represented by the Russell 1000 (RUI).
The next chart is a regular feature in this space. I decided since the premium of the CBOE Russell 2000 Volatility Index (RVX) to VIX exceeded last year’s levels that I would include all of 2016 on the chart. Note that several closings this year have resulted in RVX at a premium of over 50% to VIX.
When I see something like the chart above it scratches part of my mind that makes me want to dig deeper into the numbers. So, I did just that. At CBOE, we have RVX data going back to January 2004 so I compared RVX to VIX from then through this past Friday. The result is the chart below that shows the distribution of the RVX / VIX premium in 5% increments.
The range varies from RVX closing at a discount of 3.08% to a premium of 88.4%. The average premium is 33.75%. I highlighted the 50% to 55% range as that is where we have been most of this year. It is not terribly common, but being this high is not a huge outlier either. Summing all the over 50% plus closes gives us 14.4% of trading days since January 2004.
Finally, a trade from beginning to end that occurred last week. On Tuesday, about an hour before the market closed someone came in to the RUT post with a short-term trade that expired on the close Friday. With the Russell 2000 around 1367.00 there was a seller of 200 RUT Jan 13th 1350 Puts for 1.42 who also purchased 200 RUT Jan 13th 1340 Puts for 0.62 resulting in a net credit of 0.80.
Note the RUT level upon execution of the trade along with Friday’s close are highlighted on the payoff above. This trade turned out pretty good with both options expiring out of the money and the credit of 0.80 turning into a profit of 0.80.