You’re Killing Me Smalls (Literally)

The Russell 2000 has been beaten down since November 8th, 2021 when everyone on Twitter believed it was finally time for the breakout. After zooming out on the chart we can see that from the Covid lows to the November highs the index has retraced back to its 0.618 Fibonacci level. As someone who has been paying attention to the options flow, something is different down here.

Options flow relating to the Russell 2000 has been bearish for the past 3 months. Continuous put purchases remain strong without hope in sight. As of two weeks ago, the script shifted a bit. On January 28th the IWM tagged its 0.618 level. Order flow since then has shown signs of life with options buyers purchasing long date IWM calls as we head into a higher rate environment. On January 31st, IWM 200 puts expiring December 23rd were traded below the bid with 2200 contracts trading in one block. On February 1st, 3,000 193 puts were traded below bid, expiring February 19th and the index currently sits at 199. February 3rd saw 25,000 192 IWM puts expiring March 18th, 2022 traded below the bid. Fast forward to today and 2,000 February 14th IWM 205 calls were purchased. Contracts are currently trading at 0.92 x 0.96. The MDY, which is following the IWM closely, saw 1475 490/520 call spreads purchased for June 2022 & 1000 490/520 call spreads purchased for September. These spreads add to my conviction.

In addition to the call flow listed above, there were large spreads purchased today for the index. The ratio spreads are slightly bearish and the call spreads imply a 4-4.5% gain in the index. Today’s action showed relative strength in the banking sector, airlines, and reopening stocks while growth saw stagnant moves. The index is treading along its 21-day moving average with the 8-day sitting right above 204. A short-term price target I’m expecting is 210 if the index can remain strong. The downside would send the index down to 194 and then 190. The order flow remains strong while others look to purchase growth names that are underperforming as we head into a rate hike.