Options Traders Aren't Buying This Small Cap Rally

Yesterday, small-cap exchange-traded fund (ETF) Russell 2000 ETF (NYSEARCA:IWM) nabbed an annual high of $231.42, closing above the $230 level (2,300 for the Russell 2000) for the first time since Dec. 18. While the IWM has ceded this area today -- last seen down 1.8% to trade at $227.14 -- the ETF is worth a closer look, especially as options traders circle. 

Per the chart below, yesterday's breakout took IWM above a wedge formed from the December highs and April bottom. For now, the ETF remains above this level, but keep an eye out for it to get breached today. Year to date, IWM is up over 2%, with the sharp V-shaped rally off those April lows the defined pattern of 2025.

It's also worth noting Russell 2000 ETF's 14-Day Relative Strength Index (RSI) in the chart above, which was near "overbought" territory prior to today's pullback but has since turned lower. 

There’s a tremendous amount of pessimism around IWM, at least from an options perspective. Speculative players have been buying to open puts at a quicker-than-usual clip relative to calls. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock’s 10-day put/call volume ratio of 1.99 ranks four percentage points from an annual high. Echoing this, the ETF's Schaeffer's put/call open interest ratio (SOIR) of 2.29 sits in the 82nd percentile of its annual range, indicating that near-term traders have rarely been more put biased in the past 12 months.

Options are the route though. IWM's Schaeffer's Volatility Index (SVI) of 21% ranks in the low 11th percentile of its annual range, meaning options traders are pricing in low volatility expectations.