The first quarter of the 2017 performance race between the Russell 1000 (RUI) and Russell 2000 (RUT) came to close with large caps up 5.51% and the small cap focused RUT up 2.12%. The consensus feeling is that RUT got a little too far ahead of RUI from election day through the end of 2016 and RUI was due for a bit of catching up.
The small cap versus large cap risk index is a good way to explain the chart below. Small cap expected volatility is best represented by the CBOE Russell 2000 Volatility (RVX) index while large cap volatility is depicted using VIX. The spread between RVX and VIX closed Friday at just over 30% which is near the low end of the first quarter range. However, for a little perspective the average RVX / VIX spread for the quarter was 47% which is much greater than the 29% average from 2016.
Mid-day Friday, with RUT around 1387, one trade came in and put on a position that is based on the standard AM RUT settlement on June 16th to fall within a pretty wide range. A put butterfly was created through buying the RUT Jun 1410 Puts at 50.54, selling twice as many RUT Jun 1360 Puts for 28.53, and then buying the RUT Jun 1310 Puts for 15.82. All this resulted in a cost of 9.30 per spread. The payout at June expiration appears below.
June is a long time off, but the range of profitability for this trade is fairly wide. From the time the trade was executed the upside break-even is at 1399.30 or up about 1.2%. There is a bit more downside room with the break-even at 1319.30 or down 4.6%.