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There’s Something In the Way She Moves – Evaluating Russell 2000 Monthly Ranges $RUT

The first two months of 2016 have been challenging for many non-directional options traders.  In January the markets steadily sold off while this February we’ve seen large percentage moves both higher and lower.  When the market makes big moves it’s easy to get caught up in our emotions and say things like the market has gone “too far” or moved “too much.”  The reality is that we have no control over how much the market moves and it frequently moves much more than “it should” . . . whatever that means.

While there’s a good amount of attention paid to returns in the indexes, as non-directional traders, our ability to make money is largely related to the ranges as well.  Intuitively, if we sell premium around some range or move our pocket of decay to follow the market, the distance the market travels will have a direct impact on our trades.

This post takes a look at monthly percentage ranges in the Russell 2000 Index.  The goal in evaluating the ranges is to get an idea of the amount the market moves on average.  Understanding an average move can give us insight when we’re structuring and adjusting our positions.

Data and Assumptions:

This discussion uses Russell 2000 ($RUT) monthly price data from Yahoo Finance.  The data covers October 1987 – present and February 2016 is included in the charts below even though the month isn’t over yet.

Ranges are defined as the monthly high minus the monthly low.  To normalize the data into percentages, the range (high – low) is divided by the monthly open value of the index.

Positive and negative range values are based on the current month close relative to the prior month close.  If the current month close value is less than the prior month close value, the range for that month is negative.  Conversely, the range is assigned a positive value if the current month close value is higher than the prior month close.

Ranges by Date:

The following image displays the percentage ranges for the Russell 2000 from October 1987 through February 2016.  One of the more interesting observations is that large negative ranges seem to be followed relatively closely by large positive ranges.  That behavior suggests that the Russell can move sharply out of large declines.

The large percentage ranges in 2008 were the largest since 1987.  The January 2016 and February 2016 ranges are relatively typical in comparison.
bRussell2000PercentageRange

Frequency of Returns:

The next image is a frequency distribution for the range percentages.  What’s extremely interesting about the distribution is the relative low number of ranges in the 0% to -4% bin.  The range count is less than half as many as in the 0% to +4% and far fewer than the -4% to -8% count.  The big take away is that if the range is negative, we can assume that the range is going to be larger than 4%.  Intuitively, that makes sense because we expect the range to expand on down moves.

Another key take away is that most of the time we can expect a range greater than 4% regardless of whether the range is positive or negative.
bRussell2000PercentageRangeOccurrences

Averages:

The table below summarizes some of the key averages for the Russell 2000 percentage ranges.

The average positive range only looks at months with a positive range while the average negative range only looks at months with a negative range.  The absolute value average comes in right between the positive and negative averages.

The raw average for all returns is slightly positive at 0.84% with a standard deviation of 9.32%.  In other words, a typical month should have a percentage range of under 9%.  On up months the range might be slightly less and on down months the rage might be slightly greater, but a 9% range is fairly typical.

RUT.percentagerangeaverages

Trading Implications:

Since our focus is on non-directional options income strategies, knowing how far the market can travel (or range) is useful.  We can both structure our trades around a typical range and adjust positions to widen the range.

A butterfly strategy like the CIB generally begins with 50 point legs meaning the long strikes are 100 points apart.  With the Russell trading around 1,000 that means that the long legs effectively span the typical monthly range of 9%.  The position changes and moves with the market, but the general structure is a good starting point from a range perspective.  Other Butterfly configurations, namely Broken Wing Butterflies, have an extremely wide profit zone that provide an even wider range.

The posts below provide information on the range of profit for various options trades, which are even more meaningful when you have an idea of how much the market typically ranges.

Related Reading:

Range of Profit on Things With Wings:  A Look At $RUT Iron Condors and Butterflies

The Shocking Range of Profit on Butterflies – Analysis of Broken Wing Butterfly Option Trades

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  • albert

    very good point Dan 🙂
    i also looked into monthly stats on crashing market (2008) for self study

    worth to pinned:
    “One of the more interesting observations is that large negative ranges seem to be followed relatively closely by large positive ranges.”

    i still remembered the nightmare rally on october 2015 😀
    crazy move that i need to take into account when adjusting trades

    i will sign up for theta trend system today
    thanks

    –oot:
    will you cover a time-layered income trade?
    im thinking about a bigger condor based on 2-month expected move/ stats maybe
    and how much efficient allocation for it

    • Dan

      Hi Albert,

      Thanks for the comments and support. Yes, some of those snap back rallies are hard to trade because the market moves really fast as vol collapses. I tend to prefer down moves for a few reasons and one of them is that IV rises.

      I’m not totally sure that I follow the question about a time layered income trade. I know what you mean about measuring a two month expected move, but what do you mean by time-layered? Feel free to follow up here or shoot me an email (info at thetatrend dot com) and we discuss it more. Thanks again.

      Dan

  • Andy

    Great research and very well presented as always Dan, Thanks.
    Off topic, can anybody suggest a decent broker to trade butterflies and condors? With the adjustments I seem to be losing a very large portion of any possible profits to the high commissions.

    • Dan

      Thanks Andy and glad you enjoyed it!

      The preferred options brokers are ThinkOrSwim and Interactive Brokers. At TOS it isn’t too hard to get a rate of 1.50 per contract and IB is lower. One thing to keep in mind with commissions is that lower priced stocks and indexes are less favorable for complex spreads because the commissions represent a higher percentage of potential profit. Hope that helps and thanks again.

      Dan

  • Great research. RUT tends to be more volatile than SPX based from my experience and extensive backtesting. This is why I prefer to sell credit put spreads on RUT with a buffer of 15% or more on the down side after it has gone down 4% or more. If RUT is in no man’s land, I would sell a spread that has a buffer of 20% or more. For credit call spreads, I try to wait until it is overbought to sell them since we know that market tends to go up higher and longer. Credit call spreads tend to be challenging for RUT since it has a tendency to move much higher than SPX.

    Even with these big buffers that I have for my spreads, RUT can still make larger than normal declines like we saw this year. That is why I know some people who trade SPX exclusively to avoid such big moves.

    • Dan

      Thanks Jonathan, I agree with your take that SPX is less volatile. The main difference I’ve noticed in trading both is that SPX seems to have less noisy trends than RUT meaning there are fewer significant pullbacks. I think the same analysis above would be interesting for SPX and I may run it there as well and compare the two.

      Your spreads always have a great buffer. The longer dated options really allow you to get a nice cushion away from the money. I haven’t been selling any OTM spreads lately, but if I was I would definitely be looking at a longer DTE window as you do.

      Out of curiosity, have you noticed that SPX or RUT is better for credit spreads? In other words, do you tend to get into trouble more/less often with one of them? It seems like SPX would cause fewer issues, but do you think the slightly higher IV in RUT makes up for the additional volatility?

      • I have not noticed much difference between SPX and RUT in terms of frequency of getting in trouble. Both can be good for trading credit spreads. I trade both myself. I prefer SPX because it has more far OTM options than RUT and seems to have more volume. SPX is one of the most heavily traded securities in the world so it tends to be very liquid.

        It really comes down to risk management, trade management, money management and position sizing.

        • Dan

          Very interesting, thanks Jonathan.

          Your last sentence is extremely important . . . it’s all about risk management, trade management, money management, and position sizing.

  • The Lazy Trader

    Excellent work Dan. Thanks for sharing!
    LT

    • Dan

      Sure thing LT, glad you enjoyed it!

  • VALENE WETHERELL

    Good article, Thanks!