Bond liquidation wrecks small caps. Here's how bad some traders see it getting — SkimNews
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- Russell 2000 has fallen from a 20% YTD gain at the start of September to just 14% YTD, while the S&P 500 climbed to 20% and the Nasdaq-100 dropped to 12% — erasing small caps' earlier outperformance.
- iShares Russell 2000 ETF (IWM) shows a 0.51 correlation with the 20+ Year Treasury Bond ETF, and its correlation with the price of the 10-year note touched a one-year high above 0.97 last week, per the article.
- Kevin Gordon, head of macro research at the Schwab Center for Financial Research, said small caps have struggled to adjust to the Fed's hawkish turn, noting their negative correlation to the 10-year yield is twice that of large caps.
- IWM options turned decisively bearish on Thursday, with roughly 480,000 puts traded versus 371,000 calls and put open interest near 7 million contracts versus about 3 million calls, per Cboe LiveVol data.
- Of the $322 million in IWM options premium traded Thursday, about $100 million was likely spent buying puts compared with $50 million likely spent on calls, according to SpotGamma, though some large put-sellers were also active.
- The top four most popular IWM trades by volume were all puts, including 280- and 281-strike puts expiring that Thursday and a 269-strike Oct. 16 put that requires a 4% selloff to profit.
- Despite the options pessimism, Gordon said small caps still show strong fundamentals, citing improving PMIs and solid forward earnings estimates as reasons not to write off the group entirely.
Why it matters: Small caps' bond sensitivity — double that of large caps per Schwab — means continued yield pressure will keep the Russell 2000 lagging. Options traders are already hedging: IWM put open interest near 7 million contracts is more than double the ~3 million in calls, and the most popular single put only pays off if the ETF drops another 4%. If the 10-year keeps climbing, the hedging demand itself signals where small-cap pain lands next.
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