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Bears make a big bet on small caps

Key Points
  • Small caps tend to outerform large caps beginning in mid-December according to Stock Trader's Almanac
  • Since entering bear market territory in December, the Russell 2000 is down 5%
  • Options traders are betting on more downside for the group
Bears bet big on small caps

One trade that didn't work last year is small caps, and options traders are betting the downturn will continue.

According to a popular Wall Street theory and the Stock Trader's Almanac, small caps tend to outperform large caps beginning in mid-December. However, on December 17th, the Russell 2000 index entered bear market territory, sinking 20 percent from its all-time high hit in late August. Since then, the index is down another 5 percent.

While 2018 marks the index's worst year since 2015, options traders believe small caps could plunge even further.

On Thursday, investors bought more than 5,000 puts in the iShares Russell 2K ETF at the February 130 strike price, notes Investitute co-founder and "Halftime Report" contributor Pete Najarian.

"This is a very inexpensive trade" Najarian said on Thursday's "Halftime Report". "I'll be in these puts for just a very short time, about two weeks," he added.

These puts expire February 1st and Najarian thinks they should "perform very nicely" if the ETF trades lower to around $125.