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Index IDEA: Perceived risk levels of US small-cap stocks climb in recent weeks according to CBOE

After a bumpy start in 2016 US stock indexes, particularly those tracking small-caps, have steadliy marched upward since mid-February, as evidenced by a 14.3% rise for the US small-cap Russell 2000® Index from February 11th through market close on Friday, April 8th.

Yet according to experts from the CBOE, the perceived risk level for US small-cap stocks relative to US large-cap stocks has also increased, as evidenced by relative price levels for the CBOE Russell 2000® Volatility Indexsm (RVXsm) and the CBOE Volatility Index®(VIX®).

The RVX and VIX indexes measure forward options prices for the Russell 2000® and S&P 500 Indexes, respectively. The RVX/VIX price ratio, generally referred to as the “small cap premium,” represents the peceived market volatility for the underlying US small-caps relative to the underlying US large-caps as measured by forward index options prices. The chart below shows the RVX/VIX small cap premium from the beginning of 2015 through the end of the first quarter, indicating a recent spike to levels not seen since the Fall.

Russell Rhoads, Director of Education, CBOE Options Institute:

“Implied volatility is a forward looking measure which is an academic projection of future volatility, but for broad based index options implied volatility is more of a risk factor projecting a downside move.  Comparing the expected volatility of small cap US stocks through RVX with the expected volatility of large cap US stocks through VIX is one way to measure the relative risk perception for these two asset classes.  Also, since small cap stocks are generally more growth and domestically focused while large cap stocks are generally more global and value oriented, these indexes are tools that can be used to measure relative risk perception for those factors as well.” 

Sources:  CBOE.  Past performance is no guarantee of future results.Please see the end for important legal disclosures.

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Views expressed by Russell Rhoads are as of April 12th and subject to change. These views do not necessarily reflect the opinion of FTSE Russell or the London Stock Exchange Group.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, predicion, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the CBOE Russell 2000® Volatility Indexsm (RVXsm) or Russell 2000® Index or the fitness or suitability of the indexes for any particular purpose to which they might be put.

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Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets.

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