Options traders have turned bullish on stocks with small market capitalizations as investors rotate money out of high-flying technology names.
The number of bullish call options tied to the Russell 2000 index and exchange-traded funds that track the index have surged in recent days, according to data from Cboe Global Markets.
Call options are bets that an asset’s price will rise in the near-term while bearish put options are bets that prices will fall.
The Russell 2000 is a stock index comprised of the smallest securities in the U.S. based on their market capitalization.
Small-cap definitions vary widely. Some analysts define small-cap stocks as those with a market capitalization of between $250 million U.S. and $2 billion U.S.
Other analysts and traders view small-cap stocks as any security with a market capitalization below $10 billion U.S. and call stocks with market caps below $2 billion U.S. “micro-caps.”
The bullish options on the Russell 2000 signal that a sustained rally in small-cap stocks might be getting underway.
Small-cap stocks are seen as benefitting from coming interest rate cuts as their cost of borrowing money to fund their operations will decline.
Call options tied to the Russell 2000 index and the iShares Russell 2000 ETF (IWM) are now at their highest level in years, according to Dow Jones Market Data.
Nearly 2.1 million call options tied to the iShares ETF have changed hands in recent days, the highest level since 2009 and the sixth-highest amount on record.
Futures traders are placing the odds that the U.S. Federal Reserve cuts interest rates in September at 94% after an inflation report for June showed consumer prices declining.
Over the last four trading sessions, the Russell 2000 index has gained 7.7% and is on track for its biggest win streak since the onset of the Covid-19 pandemic in 2020.
Small-cap stocks have underperformed growth stocks such as mega-cap technology companies since the 2008-09 financial crisis.
However, there have been periods in the past where small-cap stocks have outperformed for long stretches of time.
After the dot.com bubble burst in 2000, value and small-cap stocks outperformed growth stocks for the next seven years, leading into the 2008 financial crisis, market data shows.
