Russell 2000 Index (RUT), Trending Stock Report

VIX gets all the attention, but that’s not where the action is. VIX may not be the fear gauge it once was. That’s because of Zero-Days-To-Expiration (0DTE) options. No longer do you have to buy August options to hedge against a shorter-term event. As a result, a lot of the hedging that used to take place in 30-day options now takes place on the morning of the event that has investors worried.

Today investors are worried about earnings (see the headlines on the left below). This is causing volatility expectations for the short-term to rise. The Russell 2000 Index (RUT) one-day expected volatility is about 2%. This tells us that RUT options are priced for a repeat of yesterday. We think another 2% down move is unlikely today, but we would not take that risk unhedged. We prefer to use limited risk strategies when we sell options as a method to manage our risks.

This Volatility Term Structure for RUT shows us the implied volatility of the at-the-money options for expiration today are relatively high. To learn more about Volatility Term Structure, click here. Only tomorrow’s expiration has higher volatility expectations. That is likely because PCE data, the Fed’s preferred measure of inflation, will be made public tomorrow. But that closely watched data will not come out today, so we are comfortable with a trade
idea that should profit if we do NOT get a 2% down move in the RUT index today.

This MDM graph compares the modeled expectations of current options prices (the orange line) to the actual movement of RUT’s stock price over the past year. You can see that the actual behavior (the blue histogram) shows us that RUT did NOT make big moves as frequently as modeled options prices currently expect. That is good news for our high-probability option selling strategy.

RUT’s volatility expectations and option prices for today’s expiration are unusually high for a normal day. By normal day, we are talking about a day without a CPI announcement or a FOMC meeting. Basic economic law says to buy low and sell high. So we will follow that basic economic law with a trade idea that sells expensive options in a limited risk strategy today. To get the specific strike prices and limit price on today’s trade idea, be sure to read today’s ODDS Online Daily Option Trade Idea.