Small-cap protective options in demand as market ebbs

July 8, 2014 06:00 AM

Tuesday brings a second sharp drop in equity prices without much reasoning. If anything, losses for stocks grew following news from the National Federation of Independent Business that its monthly survey raised a red flag over capital spending and a generally weak sales environment.

As is often the case following a fresh market peak, investors tend to pay less attention to shifting sands in the early stages of selling because it represents the ebb and flow of a bull market rally. The well-traded iShares Russell 2000 (Ticker: IWM) representing America’s small cap business is lower by 1.27% bringing four-day losses to 3.87%.

As the broad selling gathers momentum, options on the Direxion Daily Small Cap Bear 3x ETF (Ticker: TZA) have been active, trading on volume of 28,700 contracts within the first hour of trading. The fund, designed to rise in price three-times as fast as the small cap index declines, is higher by 3.97% to $14.66 and its implied volatility has jumped by 6.68% to 50.94% Tuesday.

First-hour volume represents almost one-in-ten of established open interest. Weekly call options maturing July 11 and 18 at the 13.0, 14.0, 14.5 and 15.0 strikes are most active as speculation grows on a possibly larger decline for small caps.


Chart: Direxion Daily Small Cap Bear 3x rising as Russell IWM declines

About the Author

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.