The S & P 500 notched its nineteenth new all-time high (for 2025) Thursday, the day before the Fed’s preferred inflationary PCE Index just matched expectations for July. This is the first big data test for Fed policy since Chairman Powell telegraphed a possible interest rate cut for the September meeting. I want to use the recent momentum in small caps to capture additional dispersion amongst the U.S. major indices. I will be using options on iShares Russell 2000 ETF (IWM) to participate in further upside in interest rate cutting benefactors, small caps. The Russell 2000 Index, a benchmark for small-cap U.S. stocks, has continued to outperform other major indices since last Friday, following Fed Chair Jerome Powell’s dovish comment. August has been particularly strong for small caps, which are up nearly 10% so far, making investors think that this laggard index may finally come back to life. For clarity, small caps have been the worst performing U.S. equity index for the last three years (per below YChart). With the Fed’s interest rate campaign back on (after a nearly one-year pause), small caps may have the ability to run harder into year end. Small caps are certainly more volatile than larger market capitalized names in the S & P 500, but high risk typically provides opportunity for high reward. The all-time high for IWM is $244.98 and this call spread in want to own is based upon a new all-time high being established this Fall. The Trade Bought the IWM $236 Call (9/30/25) for $5.85 Sold the IWM $250 Call (9/30/25) for $1.25 This call spread is a debit spread costing an investor $4.60 or $460 per one lot IWM was roughly trading $236 when this spread was established IWM needs to be over $240 by expiration for this spread to breakeven DISCLOSURES: Long this call spread All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
An options bet that wins if small caps rally into a possible Fed rate cut
