Happy Thanksgiving to all my American friends south of the border. I hope you have a wonderful holiday feast, hang out with friends and family, and watch a little football.
Yesterday’s total options volume of 47.01 million was relatively light as investors traveled for Thanksgiving or had begun celebrating a day early. About 43.86 million were equity options, with index options and others making up for the other 3.15 million.
Looking at the unusual options activity from Wednesday not much stands out regarding individual stocks. However, the iShares Russell 2000 ETF (IWM) had two calls in the top 10 regarding Vol/OI ratios. It also had 16 calls out of 275 with Vol/OI ratios of 1.24 or higher and expiring in seven days or longer.
Regarding options volume, IWM’s was slightly less (1.12 million) than its 30-day average of 1.48 million. Its share volume of 19.47 million was considerably less than its 30-day average of 29.68 million.
Yesterday, IWM’s P/C OI ratio was 2.07, only slightly better than the high for the past 52 weeks of 2.12, set in early June. However, the P/C Vol ratio of 0.87 was much more bullish than 1.17 in early June.
Small stocks have had a decent run in recent weeks. IWM is up 10.1% in the past month, about three times the SPDR S&P 500 ETF Trust’s (SPY) performance.
IWM’s unusual options activity from yesterday suggests there are opportunities to continue making money from small-cap stocks in the weeks and months ahead.
The Case for IWM vs. VIOO
Before I get into the specifics of IWM’s unusual options activity, I just wanted to discuss the pros and cons of owning IWM over the Vanguard S&P Small-Cap 600 ETF (VIOO).
As IWM’s name suggests, it tracks the performance of the Russell 2000 Index, a collection of approximately 1,945 small-cap stocks, representing 5% of the total market cap of the Russell 3000 Index. The Vanguard ETF tracks the performance of the S&P Small-Cap 600 Index, a collection of 600 U.S.-listed small-cap stocks.
Many investment professionals prefer the Small-Cap 600 over the Russell 2000 because of the higher-quality companies.
MarketWatch took a look at this in an October article. Contributor Philip van Doorn pointed out that the S&P SmallCap 600 outperformed the Russell 2000 on a cumulative basis by 24 percentage points--151% to 127%--over the past decade through Oct. 23. It’s outperformed in every period from three years to 20.
“The more selective approach of requiring at least four straight quarters of profits before a stock can be added to the S&P Small Cap 600 might explain its outperformance when compared with that of the Russell 2000. And it might interest you to see just how many of the Russell 2000 have been losing money,” van Doorn wrote.
Eight hundred eighty-one companies (44.4% of the names in the Russell 2000 index) reported an earnings per share loss in their latest fiscal year.
So, why not use VIOO over IWM?
While you should consider holding VIOO over IWM for the long haul, you won’t be using options as part of the deal. VIOO’s average 30-day volume is 12. Yes, you read that right. The most options volume in the past three months was 115 on Nov. 6. IWM’s best single day was 4.34 million on July 16.
The end of the discussion.
A Look at the Unusual Options Activity From Wednesday
As I said earlier, it had two calls in the top 10. Both the $260 strike and $265 strike expire in 37 days on Jan. 3/2025.
Six of Wednesday's 16 unusually active call options had Vol/OI ratios of 5.0 or greater. I’ll focus on these.
The best days for small-cap stocks lie in 2025 and beyond. With the new administration looking to make life a little harder for U.S. importers through tariffs, smaller companies that primarily produce and sell their products in the domestic market could do better under a Trump-induced trade war.
I will focus on three calls: the $330 strike, the $265 strike, and the $248 strike.
Why I Like Each of Them
Starting with the $330 strike, it has the longest DTE of 779 days. The ask price of $10.50 is 3.1% of the total cost should you decide to exercise your right to buy 100 IWM in January 2027.
The rationale for buying this call is that it represents a 26-month hold on IWM without having to fork over $33,000 in cash for the privilege. So, the leverage is good. Plus, you can double your money on the call by selling before expiry if it appreciates by $46.32 (19%).
IWM has gained 10% in the past month. Achieving 19% appreciation over the next 2+ years is more than possible. I like this for those bullish on small caps.
I chose the $265 strike because it had the highest Vol/OI ratio on Wednesday at 26.24, making it the fifth-highest among call options. Additionally, the ask price of $0.69 is just 0.26% of the total cost should you decide to exercise your right to buy 100 IWM on Jan. 3.
The share price must appreciate by $7.60 (3%) to double your money by selling before it expires in January. According to Barchart data, the expected move to the upside between now and Jan. 17 is $13.10 (5.4%), while on the downside, it’s $13.43 (5.6%).
While it doesn’t seem likely to be in the money by Jan. 3, the worst-case scenario is that you’re out $69.
Lastly, the Jan. 17/2025 $248 call had the highest volume of the six and a reasonably high Vol/OI ratio at 9.33.
At first glance, it’s hard to see why someone would buy this call. To double your money by selling before Jan. 17, it has to appreciate by $12.96 (5.4%). That’s the expected move to the upside by Jan. 17.
However, the ask price of $5.14 is just 2% of the total cost to buy 100 shares at expiry. That’s not massive if you're working with a decent-sized portfolio. Over the past five days, IWM’s up 3.8%, so anything’s possible.
If you want small-cap exposure, buying IWM calls instead of trying to find a needle (winner) in a haystack (2,000 companies), these three call options all provide you with the opportunity to do so.
