The Dow Jones Industrial Average, S&P 500, Nasdaq-100 and Russell 2000 are the four major stock indices. Each has a liquid counterpart in the Futures market. All four have relatively high correlations to each other but be aware that their Futures have different tick sizes and notional values. Since the lows on the night of November 9th (the Presidential election) the Dow has been up an impressive 14%, the S&P 500 11%, the Nasdaq-100 8.5% but the Russell 2000 has been up a whopping 22%! Beef, one of our research team members with a strong background in the Futures markets, subbed for Pete Mulmat and joined the guys for a discussion about the stock Index Futures and a trade proposal for our viewers to contemplate.
The Russell 2000 Index, a subset of the Russell 3000, is used by market professionals as the benchmark for measuring the performance of U.S. small-cap equities. Beef provided a table of the top 10 holdings. More importantly he explained the recent 2:1 split in the Russell Futures (/TF). He then displayed a graph with the 5 day expected range (+/- 27.40) and the 30 day expected range (+/- 67.10).
Beef had a trade proposal involving the Russell and S&P 500 E-Mini (/ES) but he explained that the first step was to determine the implied volatility (IV) adjusted notional values. The IV adjusted notional values were quite close despite the difference in their notional values. Beef’s trade idea was to short the Russell and to short the 40 Delta Put in the /ES. His idea combined the concepts of a Covered Put and a Pairs Trade.
Watch this segment of Closing the Gap - Futures Edition with Tom Sosnoff, Tony Battista and special guest “Beef” for an interesting discussion about the Russell 2000 and a trade proposal you can learn from and perhaps try out.
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