We've noted throughout 2010 that the small cap Russell 2000 index (RUT) (IWM) has been a relative outperformer versus the other major indices (QQQQ (DIA) (SPY). Especially when the market rallies recently, the IWM gains ground quicker. Take a look at the following 2010 performance chart -- IWM is blue, QQQQ is yellow, DIA is red, SPY is green.
2010 Performance Chart
You can see the IWM has steadily been above the other indices -- it also "spikes" higher in general when the market rallies. On the flip side, it also looks to come down quicker when we sell off, but still maintains a net edge in yearly gain/loss.
This increased leverage/movement/volatility is priced into the IWM options, so you do pay for the potential gains. For example, my data currently shows the IWM at-the-money August options are priced around a 27% implied volatility. By comparison, QQQQ is around 22%, DIA 19%, and SPY 20%. Some of this increased option premium pricing can be alleviated by buying deeper in-the-money options -- but also of course premium will dissipate as we get closer to expiration.
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written by mwaller, July 27, 2010
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Just FYI, Dave Fry had a piece on how seriously overweight the QQQQ is in AAPL.
http://www.thestreet.com/story/10808924/1/dave-fry-the-mystery-of-the-qqqq.html
Go check it out when you get the chance.
Jorge from Brooklyn