Small Caps Coming Up Big: Russell's Pat Fay on the One-Year Anniversary of the CBOE Russell 2000 Volatility Index

Dec 3, 2014

Investors have been flocking to equities lately, but the interest in small caps is apparently outpacing that in large caps, measured by closing prices for the RVX compared to large cap implied volatility as measured by the VIX prices.

The CBOE Russell 2000 Volatility Index (RVX) futures contract was launched on November 18, 2013. One year later, JLN caught up with Patrick Fay, director of listed derivatives for Russell Investments, at FIA Expo Chicago, to talk about the RVX index and small cap volatility.

Small cap volatility has always tended to be higher than large cap volatility, but this gap increased significantly in 2014, as reflected by closing prices for the RVX relative to implied volatility for large cap U.S. equities as measured by VIX closing prices.

The RVX is based on real-time prices of options on the Russell 2000 Index, which measures the performance of the small-cap segment of U.S. equities.

Fay said there has been a “disconnect” between large cap volatility and small cap volatility starting in February, also represented in the options volume. Small cap options volume has risen significantly, whereas large cap volume has grown, but not nearly as much.

“The RVX exceeds large cap measures such as the VIX significantly,” he said. “This year it went from its average of 29 percent higher to 71 percent higher. It has also bounced around a lot: In October, it almost matched the VIX for the first time ever. So yes, small caps do diverge significantly from large cap stocks.”

The volume in the Russell 2000 index options this year was at 90,000 contracts a day at the end of October. That’s up 22 percent from last year in October, Fay said. SPX – the large cap options – has grown, but only by 7.5 percent. So there have been a lot more contracts traded in small cap options relative to large cap options. There has been a lot more volatility in small cap stocks, so more people are flocking to the derivatives to further play that, Fay said.

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