Russell 2000 Index Seasonality and the Treacherous September – October Time Frame

September 14, 2021

In partnership with Cboe™ and FTSE Russell, Russell Rhoads, Head of Research and Consulting at EQDerivatives, is publishing a series of articles about the Russell 2000 Index. In this article, Rhoads analyzes Russell 2000 Index performance and strategies during its historically treacherous September to October time frame. 

The financial markets have an organic nature to them and tend to follow patterns when we look back over time. Regardless of how much electronic trading and portfolio construction has caught on, the organic nature of the markets is likely driven by buy and sell decisions made by people. Historically, several negative equity market events have occurred between September and October. With September in full swing, I decided to explore how the Russell 2000 Index behaves by month, using data going back to 1989.

I was surprised to discover that on average, the Russell 2000 Index typically loses value in July, August, September and October. This does not mean small-cap stocks should be completely avoided over this four-month period, but July to October has been anything but kind to small-cap stocks, with an average loss of 1.22% per year and just over half (17 of 32) of observations resulting in positive returns.

What We’ve Learned from 32 Years of Russell 2000 Index Performance

The chart below shows the average return by month over 31 years, from 1989 to 2020. The seasonality is very apparent here, with the four months previously noted (Jul. to Oct.) have averaged negative performance over more than three decades. 

Average Monthly Russell 2000 Index Performances 1989 - 2020

Data Sources: Cboe Global Markets / EQD Calculations

Over 384 months, the Russell 2000 Index was higher in 62.76% of those months. It turns out, the last two months of the year are typically the index’s best two months— based on win percentage. This coincides with strong average performance for small-cap stocks in November and December each year. The chart below shows that only four months: March, May, November and December, experience a better-than-average monthly win percentage.

Positive Russell 2000 Index Performance by Month 1989 - 2020

Data Sources: Cboe Global Markets / EQD Calculations

Three Ways to Trade a Bearish Outlook on the Russell 2000 Index

As of August 30, 2021, the Russell 2000 Index was down 1.9% since the end of June. This is a bit more downside than the average July to August performance over the last 32 years (-0.79%). If a trader remains bearish on the Russell 2000 Index, there are several opportunities to take advantage of further weakness or even limited upside over the next couple of months.

1.      Bear Put Spread

One strategy is a bearish vertical spread using options expiring on the last trading day of October, as illustrated in the hypothetical example below. All pricing is as of the market close on August 30. With Russell 2000 Index (RUT) options at 2,266, the RUT options October 29 2,300 put is purchased for $94.00 and the RUT options October 29 2,250 put is sold for $71.50, resulting in a net cost of $22.50 and a net potential return of $27.50. The payout at October expiration is below.

Russell 2000 Index Options October 28 2,250/2,300 Bear Put Spread

Data Sources: Cboe Global Markets / EQD Calculations

The payout above is based on holding this trade through the end of October. A benefit of this structure is that even if RUT options rise slightly, the trade could realize a partial profit as the break-even level is 2,277.50. Finally, a wide variety of strike prices are available, which translates into a large number of potential risk/reward scenarios. This is just one of the many alternative trades available based on a bearish outlook.

2.     Collar

Small-cap portfolio managers may consider turning to the options market to limit downside performance if there is more weakness for the Russell 2000 Index. Again, using August 30 options prices, a portfolio manager worried about performance through just the end of September would turn to options expiring on September 30.

A hedging transaction could be created by first purchasing the RUT options September 30 2,200 put for $32.00. This strike price is just under 3% lower than where the Russell 2000 Index closed on August 30. The $32.00 cost of the option represents 1.41% of the value of the Russell 2000 Index, which means purchasing this option impacts performance by that amount.

In order to lower the dollar cost, a manager may consider selling a call option to help pay for the put. The RUT options September 30 2,300 call could be sold for $33.00, which would offset the dollar cost of the put option. However, this limits upside potential for the portfolio if the Russell 2000 Index closes over 2,300 on the last day of September. The payout diagram below highlights the potential outcomes for this collar.

Russell 2000 Index Options September 30 2,200/2,300 Collar

Data Sources: Cboe Global Markets / EQD Calculations

This collar protects the portfolio from losses greater than 2.87% to the downside but limits the portfolio’s upside if the Russell 2000 Index moves up 1.54% or above 2,300. The cost of implementing this collar is limiting upside, versus giving up performance through the cost of the put option.

3.      Diagonal Spread

Finally, here is one more trade idea that takes the strong November to December performance into account. Historically, November and December are the best months to have small-cap stock exposure. If a trader believes the next two months are going to be bearish, but a year-end rally is possible, a two-step option trade may make sense. 

On August 30, the RUT options December 31 2,100 call is offered at $224.00. Buying this call option offers a trader the opportunity to benefit from a year-end run to the upside for small-cap stocks. However, there are 58 points of time value in these options. This time value may be offset by selling a call, and that call does not have to share an expiration date with the call that was purchased. If a trader expects weakness or a relatively flat couple of months for the Russell 2000 Index through October, they may consider selling a RUT options October 29 2,270 call for $73.00, which would result in a diagonal spread with a cost of $151.00. The payoff diagram below is based on pricing assumptions on the last day of October for the open long RUT options December 31 2,100 call.

Russell 2000 Index Options October 29/December 31 Diagonal Spread

Data Sources: Cboe Global Markets / EQD Calculations

This trade is not appropriate for participants with too bearish of an outlook over the next couple of months. It works based on a belief that the Russell 2000 Index has limited upside or downside potential over the next couple of months, before experiencing a year-end rally. Even if the rally starts early, this trade will do fine with an upside move, but returns are limited through the end of October. 

There is no certainty that the Russell 2000 Index is going to follow the patterns of the past over the final four months of 2021. However, each options trade starts with an outlook for the underlying market and seasonality is used as the basis for these three trading examples.

Contact the author at [email protected].


The information in this article is provided for general education and information purposes only. No statement(s) within this article should be construed as a recommendation to buy or sell a security [or futures contract, as applicable] or to provide investment advice. Supporting documentation for any claims, comparisons, statistics or other technical data in this article is available by contacting Cboe Global Markets at Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of “Characteristics and Risks of Standardized Options". Copies are available from your broker or from The Options Clearing Corporation at 125 South Franklin Street, Suite 1200, Chicago, IL 60606 or at Past Performance is not indicative of future results. The views expressed herein are those of the author and do not necessarily reflect the views of Cboe Global Markets, Inc. or any of its affiliates. "Cboe" is a registered trademark of Cboe Exchange, Inc. All other trademarks and service marks are property of their respective owners. © 2021 Cboe Exchange, Inc. All Rights Reserved.