Options traders are piling into bullish bets on small-cap stocks at a record pace

Options traders piled into bullish bets on the Russell 2000 on Tuesday, after the October consumer-price-index report sent the battered small-cap index surging to its best day in more than a year.

A team of options strategists at Goldman Sachs Group said that 1.44 million call options tied to an exchange-traded fund tracking the Russell 2000
changed hands as small caps rocketed higher and traders chased gains.

Many are betting that the index could continue to chug higher as traders anticipate that the Federal Reserve could start cutting interest rates as soon as March, according to Gene Goldman, chief investment officer at Cetera Investment Management.

This spurt of demand marked the highest daily turnover in small-cap call options ever recorded, according to data compiled by Goldman.


Interest-rate futures markets are pricing in a modest likelihood that the Fed’s first cut of this cycle could arrive at the central bank’s March meeting, while many Wall Street economists, including a team at Goldman Sachs Group, see cuts beginning later in the year.

Tuesday’s spike in call buying marked the biggest surge in volume on call options tied to the small-cap index since early June, when the Russell 2000 briefly sprinted higher, only to see its gains quickly fizzle.

Tuesday was a remarkable session for stocks, with the S&P 500 seeing its biggest daily advance since April. Meanwhile, the Russell 2000’s relative performance compared with the S&P 500
was the strongest in more than three years.

According to Dow Jones Market Data, the small-cap index outperformed the S&P 500 by 3.54 percentage points, the most since March 19, 2020, when it outperformed by 6.35 percentage points.

See: Russell 2000 outperforms S&P 500 by the most since 2020

The small-cap index is still trailing the S&P 500 and Nasdaq Composite
by a considerable margin year to date. The Russell 2000 is now up 2.3% year to date, compared with 17.3% for the S&P 500 and 34.75% for the Nasdaq, FactSet data show.

Technical analysts see signs of optimism in Tuesday’s rally, as MarketWatch reported.

See: Violent small-cap rebound paints optimistic picture for long-suffering corner of the market, technicians say

But one also noted that the index is approaching what could be a powerful resistance level: its 200-day moving average, which stands at 1,827 as of Wednesday’s close. The Russell 2000 finished Wednesday at 1,801.22, after tacking on another 0.2% daily advance.

October inflation data released Tuesday showed that core consumer prices, a category that excludes volatile food and energy prices, increased by just 0.2% last month, slower than the 0.3% rise economists had anticipated. The data helped cement expectations that the Fed likely finished raising interest rates back in July and could soon pivot to cutting borrowing costs sometime next year.

Options traders are piling into bullish bets on small-cap stocks at a record pace

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