Big Cap – Small Cap Volatilities

U.S. Small Cap Equity Market Volatility Has Continued to Diverge From U.S. Large Cap Equity Market Volatility in 2014

SEATTLE, WA–(Marketwired – Nov 10, 2014) – In October, the Russell 2000® Index gained 6.6% and is now up 1.9% in 2014 year-to-date as of October 31. And U.S. small cap equity market implied volatility spiked again. The CBOE Russell 2000 Volatility Indexsm (RVXsm) went from 21.64 on October 1 to a 26.22 closing price on October 16 (highest daily RVX close since June 15, 2012), closing at 19.33 on October 31.

Small cap volatility has historically been higher than large cap volatility. Yet this “premium” increased significantly in 2014 as reflected by closing prices for the RVX relative to implied volatility for the large cap U.S. equity market as measured by closing prices for the CBOE Volatility Index® (VIX®). For October, the premium for RVX over VIX was close to its year-to-date average of 38.2% (37.8%) as of October 31, which is much higher than its historical average of 29%.

Source: Chart data is YTD as of 10-31-2014. Russell Investments & CBOE. Small cap premium calculations are based on daily closing prices of the CBOE Russell 2000 Volatility Index (RVX) and the CBOE Volatility Index (VIX). CBOE and VIX are registered trademarks of the Chicago Board Options Exchange; S&P 500 is a registered trademark of Standard & Poor’s Corporation.

Investor interest in options based on the Russell 2000® Index has also increased significantly in October and year-to-date as of October 31. While most index options contracts saw increased volume during the month, volume growth in the Russell 2000® Index option contract (RUT) has led S&P 500 index-based options, according to data from the OCC.

According to the Options Clearing Corporation (OCC), for the month of October, 2,831,524 options contracts based on the Russell 2000 Index traded, or an average of 123,110 per day. This represents a 64% increase in average daily volume over the 74,951 contracts per day average for the full year 2013. In comparison, the large cap SPX options contract saw an 8% increase in volume for October.

Russell Indexes director of listed derivatives Patrick Fay on U.S. derivatives volume:

“In a year of above average volatility for U.S. small cap stocks relative to their large cap counterparts, U.S. small cap derivatives volume has also increased relative to large cap derivatives volume. We believe this is driven by increased demand by hedge funds playing the options due to the increased U.S. small cap volatility, institutions needing protection as the ride got bumpier throughout the year and the increased need for futures hedging by options market makers.”

...driven by increased demand by hedge funds playing the options due to the increased U.S. small cap volatility, institutions needing protection as the ride got bumpier throughout the year and the increased need for futures hedging by options market makers

For more information on the Russell 2000® Index and the CBOE Russell 2000 Volatility Indexsm, go to the Russell Indexes website or CBOE Russell 2000 Volatility Index microsite.

The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
Please note: Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
Russell’s publication of the Indexes or Index constituents in no way suggests or implies a representation or opinion by Russell as to the attractiveness of investing in a particular security. Inclusion of a security in an Index is not a promotion, sponsorship or endorsement of a security by Russell and Russell makes no representation, warranty or guarantee with respect to the performance of any security included in a Russell Index.
Opinions expressed by Mr. Fay reflect market performance as of October 31, 2014 and are subject to change at any time based on market or other conditions without notice. Past performance does not guarantee future performance.
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