Trader: For 'best bang for your buck', short this

With global stocks rallying this week, one U.S. index has been notably absent.

The Russell 2000 small-cap index is down more than 3 percent for the year while its large-cap peers have made gains. This week, the S&P 500 turned positive year to date.

Traders seem to be betting on more trouble ahead for small caps. On Thursday, the Russell 2000 ETF, IWM, saw an increase in bearish bets in the options market with two puts trading for every call.

"What struck me and others today was the poor relative strength in small caps today, with the IWM underperforming the S&P 500 by 1 percent," Dan Nathan of said.

Nathan said IWM has broken through an uptrend that has been in place since 2011, a serious warning sign for the index.

"The S&P looks like it's kind of trying to head back to that breakdown level from August. But the IWM has kind of consolidated here, it's still in a downtrend and has been yet to get back," he said Thursday on CNBC's "Fast Money."

Read MoreDon't drink 'Kool-Aid' behind rally: Fund manager

The largest IWM trade on Thursday was a sale of 15,000 previously purchased November 115/188 call spreads, as a trader apparently logged a profit on a prior bullish bet on the ETF.

According to Nathan, the lag on small caps looks like an opportunity to short IWM.

"There's some serious relative underperformance. This is the best bang for your buck if you want to short an index," he said.

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Host Bio

  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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