It’s been our view for months that the IWM, the etf that tracks small cap stocks, specifically the Russell 2000 could offer the best hedging bang for your U.S. equity buck given its relative under-performance from its all time highs made last year vs its large cap peers.
Today the IWM is breaking out of the consolidation it has been in since the start of March, and quickly approaching its 200 day moving average (yellow below) its momentum indicator it has not been above since mid August 2015:
While the IWM has clearly under-performed from the highs (down about 12% vs SPX down only 2.5%), it has massively outperformed from the February lows up about 19%.
But before anyone gets too geeked up, it’s important to note that the today’s gains puts the etf right at the downtrend from the all time highs:
One investor may be looking at the same thing, and possibly rolling hedge in the IWM options. Today at noon, when the etf was trading $112 a trader sold to close 90,000 of the May 106/96 put spreads at 62 cents, recouping $5.6 million in premium and rolling the bearish, or defensive view out and up in June expiration, buying to open 90,000 of the IWM June 108/98 put spreads for $1.50, or 13.3 million in premium. This trade breaks-even on the downside at $106.50, down $5 from the trading level and offers gains or protection of up to $8.50 between $106.50 and $98, with a max potential gain of $76.5 million.
And I’ll add one more chart why IWM remains my favorite short, looking at it from its 2009 financial crisis lows, the IWM remains below the long term uptrend, a failure at its 200 day moving average and the downtrend from its 2015 highs could make a re-test of $100 very likely in the coming months:
