Small-cap protective options in demand as market ebbs

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.