Small cap stocks had a great week last week with the Russell 2000 (RUT) rising 2.25% which the large cap focused Russell 1000 (RUI) was up about 1.6%. For the year RUI still has just over a 6% lead on RUT.
Small cap volatility as measured by the CBOE Russell 2000 Volatility Index (RVX) has spent most of 2017 at a historically high premium relative to large cap volatility, best depicted by VIX. The chart below shows RVX basically crashing to the lowest levels seen in 2017 last week. Normally this is a function of higher VIX, but this time it is about low RVX.
RVX finished the week at 11.83, a quick use of the min function in excel shows that’s the lowest close on record. In fact, the 12.65 close on Wednesday was the lowest on record and Monday when RVX settled at 12.98 that was a record low. The previous all-time low occurred back in July. The chart below shows the low to high range along with the average RVX close by year with 2017 represented data through Friday. That red dot at the lowest level on the chart is the new all-time low as well.
With about an hour to go in the trading day and the Russell 2000 near 1428 someone came in using the October 31st options with an opinion of where RUT will be on Halloween. A fairly wide Iron Condor was executed with the RUT Oct 31st 1370 Puts being sold for 8.59 and RUT Oct 31st 1460 Calls sold at 8.98. The wing purchase involved buying the RUT Oct 31st 1360 Puts for 7.46 and RUT Oct 31st 1470 Calls at 6.11. This all nets out to a credit of 4.00 with a potential loss of 6.00 which is shown on the payout diagram below.
The range is greater than 6% and has a bit more buffer to the downside with the short put strike 4.2% lower than where RUT was when the trade was initiated. On the upside, the short call strike is only 2.2% higher, but that’s 10 points higher than the 2017 high for RUT which probably offers our Iron Condor trader some confidence with this trade.