Independent futures trader John K. Stevens likes trading the Russell 2000 Index because its volatility provides numerous trading opportunities. “The Russell doesn’t sit still for long periods of time; it’s volatile,” Stevens says. Since he began trading futures, Stevens has focused almost all of his energy on trading indexes.
When he started trading three years ago, the Russell 2000 typically traded 25,000 contracts a day. It now averages 125,000 contracts per day and has gone as high as 200,000 contracts per day. That growth has been fueled by institutional traders who have increasingly focused on indexes and on hedging them in the futures market since the stock market lows back in 2002. This has resulted in “a truer trade,” he says, meaning it is more likely to follow through on trends and is less prone to bullying by locals because of greater liquidity.
“I look at the yield curve, but I like the indexes. They are more open,” Stevens says. “Take the Russell, it’s not as liquid as the [Treasury complex] but it’s inherently more volatile due to its make up.” That volatility is due to the nature of small cap stocks, which are more likely to breakout intraday. “They can make major moves. They are not as transparent, so it moves more than the other indexes as well. More than the Nasdaq or the S&P. They have bigger daily ranges than the 10-year note.”
He also believes futures on the indexes lend themselves to shorter-term trades and more trading opportunities, and for that reason it is more forgiving. “The S&P is definitely the mother of all indexes, not only terms of volume but it points out the direction. The Dow is highly correlated with the S&P,” he says. But, the Russell 2000, with its small cap composition, doesn’t move in lock step with the S&P. Stevens says while the Russell may follow the S&P, he can’t rely on the Russell doing the same thing. That provides spreading opportunities between the Russell and other indexes.
He watches a spread between the Russell and the Nasdaq, “When I see the Russell being pushed one way or another and nothing else is happening, I’ll check the spread. If the spread is starting to make a move, you have to be really careful about stepping in front of it. What I will see is people buying the Russell and selling the Nasdaq and then the S&P might follow us. So when the Russell does make its own move, it’s usually through the spread.”
