The idea for this article came from a Barron’s piece from earlier this morning about selling puts.

I know what you’re thinking: If the subject were about puts, why doesn’t the headline mention them? It’s simple. The author discusses how to utilize selling short puts to achieve a more favourable entry point into the SPDR S&P 500 ETF (SPY), the best-performing broad-market index over the past decade. 

Listen, I love the idea of using puts to generate income while obtaining shares for 20% to 30% less in the future. The downside risk, as mentioned, is if the ETF’s share price implodes because of some global economic catastrophe before expiration, and you’re forced to overpay for your shares.

With large caps and international stocks on my mind as a result of the Barron’s piece, it’s led me back to small caps—the unloved stocks of an entire generation. 

With small caps remaining one of the few value plays available right now, I’ve focused on yesterday’s unusually active options for ETFs—specifically, the iShares Russell 2000 ETF (IWM) and the iShares Core S&P Small-Cap ETF (IJR).

Yesterday, IWM had 48 unusually active options. IJR had none. That doesn’t make IWM the better buy. Here’s why. 

IJR’s Higher Quality Holdings

Before getting into the options angle, I’ll consider the differences between the two ETFs. The first is the number of holdings. 

IWM tracks the performance of the Russell 2000 Index, a collection of approximately 2,000 of the smallest stocks in the Russell 3000 Index. The former accounts for approximately 5% of the Russell 3000. The Russell 3000 accounts for 98% of the total investable market in the U.S. That means the Russell 2000 accounts for 4.9% of the entire U.S. market. 

IJR tracks the performance of the S&P SmallCap 600, which accounts for approximately 2.3% of the market cap of all U.S. publicly traded companies.

So, IWM has 2,104 holdings, for an average weight of 0.0023% of the U.S. market, compared to IJR’s 629 holdings and average weight of 0.0037%. 

It might not seem like a significant difference, but when spread across thousands of companies, it becomes a substantial issue in terms of quality.

The second difference, beyond the number of stocks held by each ETF, is the inclusion criteria required for each benchmark index. 

To be included in the S&P SmallCap 600, a company must have four consecutive quarters of profits, including its most recent. The Russell 2000 comprises approximately 2,000 of the smallest stocks from the Russell 3000. There is no profit requirement.  

Furthermore, the Russell 2000 is reconstituted annually in June. However, FTSE Russell intends to move the index to a semi-annual reconstitution schedule in 2026. 

In contrast, the S&P SmallCap 600 undergoes no reconstitution. Rather, it rebalances four times a year, in March, June, September, and December, with additions and deletions agreed upon by an investment committee, making a stock’s inclusion far more objective than that of the Russell 2000.  

Lastly, the Russell 2000 is far more expensive than the S&P SmallCap 600, with a forward P/E ratio of 25.1, compared to 15.6 for the latter, as of June 26.

As shown in the chart above, the valuations of the two indices were very close in 2009, 2012, and 2020. Otherwise, the Russell 2000 has been significantly more expensive, resulting in relative underperformance compared to the S&P SmallCap 600.

Through May 31, the five-year total annual return of IJR was 11.51%, 200 basis points higher than IWM.  

IJR and IWM Options Possibilities

As mentioned earlier, IWM has significantly higher options volumes than IJR. The former’s 30-day average is 1.16 million, while the latter’s is minuscule at just 451. Interestingly, while IWM’s options volume is significantly higher, the 30-day average for its shares is 33.77 million, only 7.1 times higher than IJR. 

While investors like both, more aggressive and speculative investors lean heavily toward IWM due to its liquidity. But that doesn’t mean an options play isn’t available for IJR.

Of the 48 unusually active options for IWM yesterday, I’ll hone in on the 23 puts, opting for strike prices 20% to 30% below Wednesday’s $221.03 closing price. That leaves just one possibility: the June 17/2027 $180 put. 

With 715 days to expiration (DTE), the $6.50 in premium income results in an annualized return of 1.5%. That’s not great, given the high DTE and approximately a 34% chance that the share price will be below $180 in June 2027. 

Yesterday’s IJR options volume was tiny at just 150, one-third its 30-day average. So far in 2025, it has had daily volumes over 2,000 on just two occasions: March 31 and April 9. It’s going to be tough to find a put to lean into.

Given IJR’s current share price of $112.96 as I write this on Thursday midday, I’m looking for a put between $80 (30% lower) and $90 (20%). I managed to find one with volume in today’s trading. 

The Feb. 20/2026 $85 put strike price is about 25% below its current share price, right in the middle of the range I was looking for. The Vol/OI ratio of 1.67 makes the put unusually active. 

The bid price of $0.65 represents an annualized return of 0.91%, which is even lower than that of IWM. However, by selling the $85 put, if you had to buy the shares, it would be at a better entry point than IWM.

Given the quality of stocks in IJR is better than that of IWM, I’d be more inclined to go with the former’s $85 put, as the ETF is a better way to bet on the long-term success of small-cap stocks.   

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.