Small caps have been making big money this year.
The Russell 2000 index is up 5 percent this year, far outpacing the S&P 500 and Dow returns. Despite the rally, one trader says there is still an inexpensive way to play the sector: the options market.
Implied volatility—a fancy term for the price of options—for small cap stocks has collapsed.
"Ideally you want to be buying that volatility when it looks attractive," said Stacey Gilbert, Susquehanna's head of derivative strategy. Referring the Russell 2000 ETF IWM, she said: "In this particular case I'm defining attractive as IWM volatility has come in at some of the lowest levels in two years."
The decline in options prices reflects growing bullish investor sentiment. According to Gilbert, small-cap stocks owe much of out-performance to one thing: the dollar.