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Small-cap sector faces bearish play

David Russell (david.russell@optionmonster.com)

Small caps have been lagging recently, and now the bears are stepping in.

optionMONSTER's trade scanners detected heavy buying in the January 32 calls in the ProShares UltraShort Russell 2000 exchange-traded fund, which moves twice as much as the benchmark small-cap index but in the opposite direction. More than 7,700 of the calls were purchased for $0.05 against previous open interest of just 41 contracts, clearly indicating new activity.

These long calls lock in the price where the TWM can be purchased. The trade is bearish because the fund moves inversely to the broader market, with the potential to generate significant leverage from a selloff. (See our Education section)

The TWM is up 0.95 percent to $13.67 in morning trading. The decision to bet against the Russell 2000 comes after the index rose less than 2 percent in the last month, compared to a gain of more than 4 percent for the S&P 500 and Nasdaq 100. The RUT had outperformed over long time frames, so the investor apparently thinks that money is rotating away from small caps.

Total option volume in the TWM is 8 times greater than average so far today, with calls outnumbering puts by more than 200 to 1.

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