Rare Options Signal Sounds During Small-Cap Sell-Off

IWM snapped its six-month winning streak in September

Karee Venema
Oct 4, 2018 at 11:32 AM
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The iShares Russell 2000 ETF (IWM) took a quick bounce off its 200-day moving average back in early April, and has since added 12% to trade at $164.98. More recently, the shares of the small-cap tracker spent September retreating from record-high territory, and while a recent options signal suggests IWM could rebound sharply in the short term, it also points to notable long-term underperformance.

Looking closer at the charts, IWM topped out at a record high of $173.39 on Aug. 31, before embarking on a September pullback that totaled a 2.6% loss at last Friday's close -- marking the exchange--traded fund's (ETF's) first monthly loss since February. The shares have since consolidated near their 120-day moving average, while just below here is the $163.50 region, home to 38.2% Fibonacci retracement of the fund's April-to-September surge.

iwm daily price chart oct 4

Amid the fund's month-long pullback, the SPDR S&P 500 ETF Trust (SPY), Invesco QQQ Trust (QQQ), and IWM 20-day buy-to-open (BTO) put/call volume ratio fell to 1.48 on Oct. 2 -- a year-to-date low -- after being north of 2.00 as recently as August, driven mostly by the action on the IWM, according to Schaeffer's Quantitative Analyst Chris Prybal. In fact, the fund's individual 20-day put/call volume ratio across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) plunged to 1.42 on Oct. 2, from its Aug. 31 reading of 2.33.

Furthermore, data collected by Prybal shows this is just the fourth time since 2010 the cumulative 20-day put/call BTO volume ratio has breached 1.50. While the subsequent IWM returns going out to the two-month mark show significant outperformance -- including an average post-signal one-month gain of 3.6%, versus an anytime return of 1.08% -- the fund's longer-term performance isn't so encouraging. Most notably at three months out, IWM has returned 1.88%, on average, after a signal, compared to a larger anytime return of 3.17%.

iwm returns since 2010

What's especially interesting, according to Prybal, is that this dip in put buying coincides with a rise in IWM's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR). On Oct. 2, this ratio came in at a top-heavy 4.70, meaning near-the-money puts outpace calls in the monthly October series by an almost 5-to-1 ratio.

Drilling down, the October 155, 159, 165, and 168 puts are home to peak front-month open interest, with 272,218 contracts collectively outstanding. What's more, this accounts for nearly 9% of IWM's total put open interest.

Data from the ISE, CBOE, and PHLX points to the potential initiations of long put spreads using the October 155 and 165 strikes back in late August, when the fund was trading near $170. Meanwhile, data from the major options exchanges confirms significant sell-to-open activity at the October 159 put when IWM was scaling record highs, while the October 168 put has seen mostly buy-to-open action over the last two months.


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