Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / Day Trading the Small Cap Surge With Options
Transcript
- Lucas: So the Russell 2000 is up three point six percent in the last five days. That is nearly triple the S&P 500's one point two percent over the same stretch. Small caps are absolutely ripping, and day traders are trying to figure out how to play this without getting burned by the volatility. Luna: Three point six percent in five days — that's huge for an index that usually moves half that. The VIX is down to sixteen point four one, so overall fear is low, but the VVIX — the VIX of the VIX — dropped eight and a half percent to eighty eight. That tells me options sellers are getting aggressive. Lucas: Exactly. And that's the setup I want to talk about. When small caps outperform like this, the options market tends to price in elevated implied volatility on the IWM — the Russell 2000 ETF — because traders expect the move to continue or reverse violently. But the VVIX dropping suggests that volatility of volatility is compressing, which is a green light for selling premium. Luna: So you're looking at a put credit spread? That's what a lot of people are doing right now in this environment. Lucas: Yeah. Specifically, I'm looking at selling the IWM July 2,900 put and buying the July 2,850 put as a hedge. That's a five-dollar-wide credit spread. With IWM around 2,919 right now, the 2,900 strike is about nineteen points below the current price — roughly 0.65 percent downside. Collect around 0.80 to 0.90 per spread, depending on where volatility settles tomorrow morning. Luna: So max profit is that credit, and max loss is the width minus the credit — around four twenty per spread. That's a risk-reward of roughly four and a half to one. That's not great if you're used to one-to-three or better. Lucas: Right, but the probability of profit is high. The 2,900 put has a delta around 0.20, so roughly an eighty percent chance of expiring worthless. And with the VVIX dropping, even if the market drifts lower, the vol compression helps your position. The spread benefits from time decay and falling implied volatility both. Luna: But what about the Strait of Hormuz situation? That headline from today — traders skeptical of the reopening timeline — that kind of geopolitical risk could suddenly crush risk appetite and hit small caps hardest. Lucas: It's a real risk. Small caps are more sensitive to economic uncertainty than large caps because they have less pricing power and weaker balance sheets. If oil spikes again on a Hormuz disruption, that's a headwind for small-cap earnings. But here's the thing: the Russell has already shown resilience this week. It barely flinched at the news. That tells me there's momentum behind this move. Luna: And the Nvidia announcement — one hundred fifty billion in spending plans — that's boosting tech and Taiwan chip stocks, but it's also lifting the whole market. Small caps are benefiting from that risk-on tone. Lucas: Exactly. So if you're trading this spread, you want to watch the 2,900 level on IWM like a hawk. If it breaks below 2,900, you need to have an exit plan. I'd set a stop loss at a loss of 1.50 per spread — that's about thirty percent of max loss — or if the underlying drops below 2,880, just close the whole thing. Luna: What about the expiration? July is about seven weeks out. That's a lot of time for a surprise. Why not go with June monthly? Lucas: June would give you higher theta decay — that's the time decay — but the credit would be smaller, maybe 0.40 to 0.50, and the probability of profit is lower because there's less time for the trade to work. I like July because it gives you a cushion. The Russell can have wild intraday swings, and with seven weeks, you can ride out a temporary dip. Plus, the implied volatility term structure is slightly upward sloping, so you get a bit more premium for selling the further-out expiration. Luna: That makes sense. And speaking of premium — the VIX at 16.41, that's still elevated relative to the long-term average around 15. So options are still relatively expensive. Selling premium has been a winning strategy this year. Lucas: It really has. And the VVIX drop is the confirmation — when the vol of vol collapses, it's historically a signal that large option buyers are stepping back. That's when selling premium gets safer. But you still need a defined risk trade. Naked puts in this environment would be reckless. Luna: So for someone who wants to try this, what's the minimum account size you'd recommend? Lucas: I'd say at least ten thousand dollars so you can do five to ten spreads and not be overconcentrated. Each spread ties up about four hundred twenty dollars in buying power, so ten spreads is four thousand two hundred — that's forty-two percent of a ten-K account. That's a lot. You'd want to keep it to maybe five spreads max if you're under twenty-five thousand. Luna: Good point. Small accounts need to be careful. The Russell is not forgiving. Lucas: And on that note, I want to mention something quickly. We do these episodes every day, and they're ad-free. A handful of listeners support the show through buy me a coffee dot com slash fexingo, and that's what keeps these coming without any sponsor interruptions. Luna: Yeah, it's a small group, but it makes a real difference. If our conversations have helped you think about a trade or a risk differently, that's exactly the kind of support that keeps the lights on. Lucas: Appreciate it. So back to the trade — the other angle I want to highlight is the crude oil connection. With the Hormuz closure, crude is spiking, and that tends to hurt small caps because they're more energy-intensive. But this week, the Russell is ignoring it. That's a sign of strength. Luna: If you look at the correlation between IWM and USO, the oil ETF, it's actually turned slightly negative over the past week. Normally they move together, but right now, small caps are decoupling. That's bullish. Lucas: It is. And it gives me more conviction on this put credit spread. If the Russell can shrug off a geopolitical shock, it can probably handle a normal pullback. The main risk now is a sudden spike in the VIX — if fear comes back, all risk assets sell off. But the VVIX dropping suggests that's not imminent. Luna: So in summary: sell the IWM July 2,900/2,850 put credit spread, collect around 0.85, manage risk with a stop at a 1.50 loss. Keep position size small relative to account. Watch the Strait of Hormuz headlines. Lucas: Exactly. That's the setup. We'll see how it plays out over the next few weeks. If the Russell holds above 2,900, this trade should work nicely. If not, you'll know early because the stop is tight. Luna: Alright, thanks Lucas. Good discussion. Lucas: Thanks Luna. See everyone tomorrow.