Traders in the small-cap stock ETF IWM are exhibiting heightened caution as they prepare for a series of important U.S. economic reports, including the personal consumption expenditures (PCE) price index, which is the Federal Reserve's preferred inflation measure.
Despite a robust 40% rally over the past year, outperforming both the S&P 500 and Nasdaq-100, options trading indicates a bearish outlook for the Russell 2000. On Wednesday, over 70% of options premium traded was in puts, a stark contrast to the 60% in the Nasdaq-100 (QQQ) and less than 40% in the S&P 500 (SPY).
The volume of put contracts traded was nearly three times that of calls, with more than 380,000 puts purchased against under 270,000 sold, according to ThinkOrSwim data. This bearish sentiment may stem from the small-cap index's vulnerability to rising interest rates, as it comprises a higher proportion of unprofitable companies.
Additionally, the bond market has seen a rebound after Treasury yields reached multiyear highs last week. The upcoming economic data, which includes weekly jobless claims, durable goods orders, an update on American GDP, and the PCE index, could further influence market sentiment.
A notable example of the bearish trading activity was a trader who invested $11.4 million in 277 puts expiring July 17 while selling $3.6 million in 271-strike puts expiring June 18, effectively betting on a 7% decline in IWM by mid-July