Russell 2000 attracts big call spreads

The Russell 2000 Fund gapped higher at the open this morning, and some big call spreads have helped drive its option volume over 270,000 contracts--more than its entire daily average--less than an hour into the session.

The IWM is up 1.9 percent to trade at $82.69 after gapping to its highest level since July 26. The fund hasn't closed below its 10-day moving average since Dec. 16. The trend higher has been accelerating and the curve steepening.

optionMONSTER's Heat Seeker system shows that a trader sold 15,000 March 83 calls for $2.01 against open interest of more than 72,000. Seconds later, he or she bought 15,000 March 85 calls for $1.12. This volume was more than the previous open interest at that strike.

In the same time frame, 7,500 June 86 calls were bought for $2.95 at less than open interest, and 7,500 June 88 calls were sold for $2.11. This was a new opening position.

There are a variety of possible reasons behind these trades, but two seem most likely given the stock move. The first is that a trader was rolling the March position higher to lock in some profits while keeping upside potential. Then a trader, possibly the same one, is opening a bullish call spread in June.

The other possibility is that the trader had on a short diagonal spread, long the March 83 calls and short the June 86 calls. If so, he or she is now rolling that up by selling that position and opening the higher diagonal and is left long the March 85 calls and short the June 88 calls.

In any case, the call activity is almost certainly bullish and looking for a continued run higher in the Russell 2000. (See our Education section)

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