Russell 2000 Index (RUT), Trending Stock Report

The Russell 2000 Index (RUT) made a new all-time high July 16th. It then sold off gently. On July 26th, it made an attempt to set a new record, but got rebuffed just below the old high. On July 31st, it got within striking distance of the mid-July high, but again, failed to break through. Then came last week’s shocking Jobless Claims report, which led to three consecutive days of 3% declines.

While we are not going to take a stand and say RUT is going to move up, we don’t believe RUT declines will continue at the same velocity. While the index may decline, the speed of the decline will likely decelerate. This is typical after we see a volatility spike like the one that occurred Monday morning. Investors are watching the Jobless Claims report due at 8:30 am ET this morning. This newsletter is written before that report is posted. However, after the last Jobless Claims report came out of the blue and surprised investors, it is less likely that this morning’s report will be a surprise. Our bet is not that the index won’t fall, our bet is that it won’t fall more than 2.7% today.

This Volatility Term Structure for RUT shows us the implied volatility of the at-the-money options for each expiration. To learn more about Volatility Term Structure, click here. You can see that today’s expiration has the highest volatility expectations of all terms. That is likely because the Jobless Claims report, scheduled for this morning, is making investors nervous after the last one caught investors off guard.

This MDM graph compares the modeled expectations of current options prices (the orange line) to the actual movement of RUT’s price over the past year. You can see that the actual behavior (the blue histogram) shows us that RUT made fewer big moves than modeled options prices currently expect. That is good news for our high probability option selling strategy.

Investors are focused on the Jobless Claims report this morning. Volatility expectations on the RUT are higher than they should be given the behavior of the index over the past year. It is unlikely that the Jobless Claims report will surprise investors the way the previous report did. Even if today’s Jobless Claims report is bad, it is unlikely that RUT will fall at the same velocity that it did after the last report.
This sets up an opportunity for a limited-risk, high-probability trade. To get the specific details and prices on today’s trade idea, be sure to read today’s ODDS Online Daily Option Trade Idea.