The demand for bullish call options linked to the Russell 2000 has surged, significantly outpacing the demand for bearish puts. This surge is sending an encouraging message for small-cap investors.
According to Mandy Xu, head of derivatives-market intelligence at Cboe Global Markets, the recent sessions have seen a notable increase in the demand for call options tied to the Russell 2000 and the exchange-traded fund (ETF) that tracks this index. This increased demand has pushed these contracts to trade at a premium relative to bearish puts, signaling potential continued momentum in the small-cap rally, at least in the near term.
Xu highlighted a similar pattern that emerged in late 2023 when investors boosted stocks expected to benefit from aggressive Federal Reserve interest-rate cuts. During that period, the Russell 2000 rallied more than 20% between early November and early December, outperforming both the S&P 500 and the Nasdaq Composite, according to FactSet data.
“We saw this in the fourth quarter last year when bullish sentiment in small caps hit an extreme, though ultimately, the trade faded as rate-cut bets were pared back. Will it be different this time?” Xu commented in an email.
Call options grant traders the right to buy shares of the underlying stock or ETF at an agreed-upon price before they expire, while put options give traders the right to sell. Option contracts tied to an index are usually settled in cash.
On Thursday, trading volume for calls tied to both the Russell 2000 and the iShares Russell 2000 ETF (IWM) reached their highest levels in years, as reported by Dow Jones Market Data. Nearly 2.1 million calls tied to the ETF were traded that day, marking the highest daily turnover since December 2009 and the sixth-highest on record since 2005. Call options directly linked to the index saw their highest volume since 2021.
Thursday also marked the Russell 2000’s best session since November. Small-cap stocks soared following a softer-than-expected inflation reading from the June CPI report, which revived expectations of a Federal Reserve interest rate cut in September.
The Russell 2000 outperformed major indices like the S&P 500 and the Nasdaq, showing its most significant outperformance since March 2020 when the COVID-19 pandemic initially impacted global markets, according to Cboe data.
Over the past four sessions, the Russell 2000 has gained 7.7%, on track for its best four-day streak since 2020, according to Dow Jones Market data. The index is poised to finish at its highest level since January 2022.
Demand for bullish call options has remained elevated since Thursday. Trading volume in call options tied to the iShares ETF has been more than triple the daily average from the past two years on both Friday and Monday, according to market data.
The call-put volume ratio, which compares activity in bullish calls to bearish puts, has also stayed above average.
On Monday, the Russell 2000 was up 2.1% at 2,194, while the S&P 500 was up 0.1% at 5,619. The Nasdaq also saw a 0.1% increase to 18,415. Meanwhile, the Dow Jones Industrial Average (DJIA) was up 157 points, or 0.4%, at 40,281.
