The S&P 500 is up nearly 19% in 2023, one of its better years over the past decade, and a significant improvement from a 19.4% decline in 2022. Things are so good some Wall Street strategists believe the index could hit an all-time high of 5,100 by the end of 2024.
“We believe 2024 will be Year 2 of at least a 3-5 year process that will see US stocks exhibit more normal and typical performance, paced by a backdrop of normal and typical GDP and earnings growth, valuation, and bond yield ranges,” Yahoo Finance reported BMO chief investment strategist Brian Belski’s comments on Nov. 27.
However, contrarians might consider another play: the Russell 2000, an index focused on smaller companies. A big reason for doing so? The so-called “Magnificent Seven” stocks account for nearly 30 of the S&P 500’s market cap. Should these seven stocks falter in 2024, the index will also falter.
Meanwhile, if interest rates start to fall in 2024, smaller companies will benefit from lower interest expenses and cost of capital.
YTD, the Russell 2000 is up less than 3%, one-seventh the performance of the S&P 500. However, in the past month, both indexes are up more than 9%, suggesting that small-cap stocks are starting to move higher.
Here are three options to consider from the iShares Russell 2000 ETF (IWM) to bet on smaller stocks moving up in 2024.
Jan. 19/2024 $183 Call
The ask price Monday for the IWM call was $3.10, a 1.7% down payment on 100 of the ETF’s shares. The volume yesterday was 828, 1.99x its open interest. It's not a big Vol/OI ratio, but it's unusually active, nonetheless.
So, the call has 52 days to expire, with a delta of 0.40036. That means you could double your money on the call with a $7.74 move by IWM’s share price over the next 7.5 weeks. That’s 4.3% based on yesterday’s closing price of $178.73.
To even consider exercising your right to buy 100 IWM shares in January, the share price has to move higher than your net price of $186.10, a legitimate possibility, just 4.1% higher than its current share price.
In the worst-case scenario, IWM moves lower, and you’re out the premium of $310.
April 19/2024 $180 Put
This IWM put had a Vol/OI ratio on Monday of 4.20, which isn’t double digits, but it’s still reasonably robust, with more than 2,000 trading on the day.
The put’s bid price was $7.60, an annualized yield of 11.0%, a reasonable return for an income play. Slightly in the money, another 9% move higher over the next five months would put it around $195, well out of the money, allowing you to pocket the $760.
But a lot can happen in five months, so the bid is so high. If a recession hits -- former Secretary of the Treasury Larry Summers, who served under Barack Obama, believes there is a 20-25% chance one will happen in the first half of 2024 -- it’s unlikely that stock prices will maintain their momentum. That’s especially true for smaller stocks held by IWM.
At the same time, your net price paid should the shares be put to you would be $172.40. That’s not a bad entry point if you are considering going long. Except for late October, IWM hasn’t breached the $170 level in the past 12 months, trading above $170 since November 2020.
I like the dual-income/capital appreciation potential of the $180 put.
April 19/2024 $174 Put
The final put of the bunch had a Vol/OI ratio of 1.50 yesterday, which barely meets the minimum ratio of 1.25 for unusual options activity.
The $174 put expires at the same time as the $180 above. The bid price was $5.27, an annualized yield of 7.4%, 360 basis points less than the $180. However, it’s still reasonably attractive relative to 6-month Treasuries at 5.465%.
The net price paid should the shares be put to you would be $168.73, about 5.6% below where it’s currently trading. Usually, if I were merely interested in an income play, I’d go for the put with the lower net price to ensure I pocketed the $527.
However, in this case, I believe smaller stocks could deliver in 2024, meaning there’s an interest in buying the shares. At the same time, while the $174 put provides an entry point that’s $3.67 lower (2.1%) than $172.40 for the $180 put, my gut tells me that if the share price falls over the next five months, it might not get down to below $168.73.
So, it depends on whether you’re interested in income or looking for a better entry point. I’d go with the $180 put if it's the latter.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
