To The Moon

1.Small-cap stocks continued to outperform their large-cap counterparts this week.

On Tuesday, the $iShares Russell 2000 ETF(IWM)$ outperformed the $S&P 500(.SPX)$ for the fourth straight session, while the Russell 2000 index of small-cap stocks posted its 5th straight day of gains, ending Tuesday up 3.5%, bringing its gain over the last five sessions to 12% and year-to-date to 11%.

According to statistics, a similar situation has only been seen before in the important time nodes of Lehman Brothers (October 2008), Trump's election (November 2016) and Biden's election (November 2020).

Investor enthusiasm has surged, driving a spike in demand for Russell 2000 Index-related call options.

On last Thursday, call options linked to the $ProShares Ultra Russell2000(UWM)$ and $iShares Russell 2000 ETF(IWM)$ saw their highest trading volume in recent years, according to Dow Jones market data. Nearly 2.1 million call options tied to the ETF changed hands that day, the highest daily volume since December 2009 and the sixth highest since 2005.

Similarly, the volume of call options directly linked to the index reached its highest level since 2021. This suggests that the small-cap rally may have room to rise in the near term.

The movement of U.S. small-cap stocks is often seen as a "barometer" of potential interest rate easing and an indicator of the state of the economy. The current surge in the Russell 2000 Index is fueled by two primary factors: firstly, the significant valuation recovery potential of small-caps after two years of dormancy compared to mid- and large-cap stocks and tech giants; secondly, the direct catalyst of interest rate cut expectations.

A similar scenario played out in the fourth quarter of last year, when bullish sentiment in small-cap stocks reached extreme levels as expectations of interest rate cuts also rose rapidly. The Russell 2000 rose more than 20% between early November and early December, outperforming the $S&P 500(.SPX)$ and $NASDAQ(.IXIC)$ over the same period.

2. What options strategy is suitable for small cap stocks?

For the current small-cap stock market, the most direct way is to directly buy the call option of the Russell 2000ETF IWM, the strike price can choose the flat-value option, that is, the call option with the strike price of about 225, and the exercise time can choose about one month. Buying call options outright is the most profitable way.

For investors uncertain about the sustainability of the small-cap rally, Spread Strategy can help mitigate losses stemming from incorrect judgments.

What exactly is a Bullish Put Spreads Strategy?

Why Use a Bull Put Spread?. When the stock market is relatively… | by Matthew "Whiz" Buckley | Medium

A bullish put spread involves selling a put option while buying another put option with the same expiration date but a lower strike price (on the same underlying asset). Since the premium for selling a put option is higher than the premium for buying a put option, investors usually net a positive premium.

This strategy is suitable when investors anticipate a market rise but with limited upside potential, while also seeking protection against significant downside risks.

3. What are the functions of the Bullish Put Spreads Strategy?

1. Low-Risk Premium Income: When aiming to generate premium income with relatively low risk, the bullish put spread is ideal, offering a lower risk profile than outright selling puts.

2. Cost-Effective Stock Acquisition: The strategy can serve as an efficient means to acquire desired stocks at a price below the current market level.

3. Profitability in Volatile Markets: By limiting downside exposure, the bullish put spread can capitalize on market volatility, earning profits even when prices decline.

4. The application of bullish spread strategy in $iShares Russell 2000 ETF(IWM)$

Taking the Russell 2000 as an example, when the US stock market opened on July 17(Beijing time), the trading price of IWM was $224.6. An options trader expects it to trade as high as $240 in a month, but he is also concerned about the potential downside risk of IWM and can use the bullish put spread strategy.

• Step1: The trader sold the put option with a strike price of $240 and an expiry date of August 16, trading at $16.14 and receiving a payout of $1,614.

• Step2: Buy a put option contract with a target price of $224 simultaneously, trading at $5.11 and paying a $518 premium, also expiring on August 16.

At the time of strategy establishment, since each option contract represents 100 shares, the options trader's net premium income is (16.14-5.11) x 100 = $1103.

When the option expires a month later, the maximum gain occurs when the stock is trading above the strike price of the $240 put option.

The maximum return of the strategy = the royalty received, that is, $1096, that is, no matter how much the stock price rises, the maximum return is locked, the maximum is $1096.

The maximum loss of the strategy = the difference between the strike price of the put option (i.e., the strike price of the short put minus the strike price of the long put) - the premium received, i.e. (240-224) x 100-1103= $497, no matter how much the IWM stock price falls, the maximum loss is $497.

In this strategy, if $iShares Russell 2000 ETF(IWM)$ rises modestly, investors will not miss out on profits even if they have a guaranteed loss. In the case of a boom, investors' profits are locked in, and in the case of a slump, investors' losses are limited. So this strategy is best for moderately rising markets, but because of its limited risk nature, aggressive investors can also be used to buy bottom.