The good times for small-cap investors may be near.
Over the past few trading days, demand for call options on the Russell 2000 index and the exchange-traded funds (ETFs) that track it has surged, driving the value of those contracts relative to the price of puts, according to Mandy Xu, director of derivatives market intelligence at the Chicago Board Options Exchange (Cboe Global Markets).
This suggests that the small-cap rebound may have more room to run in the near term. “We saw a similar pattern at the end of 2023 when investors pushed up stocks that were expected to benefit from a large Fed rate cut,” Ms. Xu noted. The Russell 2000 index rose more than 20 per cent between the beginning of November and the end of December last year, outperforming the S&P 500 and Nasdaq Composite Index.
“Will this be different?” Ms. Xu asked.
Call options give the holder the right to buy a stock or ETF at an agreed price before the option expires. Puts give the holder the right to sell. Options on the index are usually settled in cash.
According to Dow Jones data, trading volume in call options on the Russell 2000 index and iShares Russell 2000 ETF reached a year-high on Thursday. That day, nearly 2.1mn contracts on the ETF traded, the highest daily volume since December 2009 and the sixth highest since 2005. Trading volume in call options on the index directly related to it reached a year-high.
The Russell 2000 index has been the best performer since November, and demand for call options has remained high since then. Trading volume in call options on the iShares ETF was more than three times the two-year daily average on Friday and Monday.
The call-put volume ratio, a measure of the relative activity in call and put options, has also been consistent.
The Russell 2000 index rose 2.1 per cent on Monday to 2,194, while the S&P 500 rose 0.1 per cent to 5,619. The Nasdaq Composite Index rose 0.1 per cent to 18,415. The Dow Jones industrial average (DJIA) rose 157 points, or 0.4 per cent, to 40,281.