Lost in all of the noise of the war in the Middle East was the latest report from the National Federation of Independent Business. Why is this important you ask? It is important because small businesses and small-cap stocks had been leading the rally in stocks in the U.S. in 2026. In fact, it was the performance of these companies that had been largely left out of the rally in 2024 and 2025 that gave hope of a cyclical upturn in the economy. Presaging the move in the last half of 2025 into 2026 was the pickup in confidence among independent businesses. Perhaps because of rate cuts, deregulation or lower tax rates, small businesses came out of the funk induced by the tariffs in early 2025 to turn the most optimistic they had been since 2021. This gave a tailwind to the Russell 2000 futures. The reading on March 10 fell from 99.3 to 98.8 – not a large fall but less than the expected increase and perhaps a sign that the tailwinds expected in their businesses are either not materializing or expected to go away as a result of higher input costs. 

A major driver of small business optimism is the cost and availability of capital. While large firms can tap into large bank syndicates as well as the capital markets for funds, small firms are reliant on banking relationships for growth capital. The higher interest rate environment since 2022 had hit small businesses particularly hard. In addition, as bank regulation increased, the availability of capital was also worse. The top chart shows the performance of Russell 2000 futures compared to Fed Funds futures 6 months ahead. As Fed Funds futures rally, rates go lower, I see Russell go higher. In the last 6 months, Fed Funds futures have flatlined while Russell continued higher. The latest pricing rate cuts out of the curve over the next 6 months serves to show how extended equity prices may be from the current rate trajectory. However, it is not just the cost of money but the availability as well. The bottom chart shows the Federal Reserve Senior Loan Officer Survey, which asks what percentage of banks are tightening credit for small firms. I will show the inverse here. As firms ease credit, it is good for stocks and vice versa. You can see these easing of credit has leveled off, again suggesting that Russell futures may be ahead of themselves.

In order to have a sense for what the market may be thinking, it is time to turn to the technical charts. In the top chart there’s the daily Ichimoku cloud chart. You see the price has fallen below the Ichimoku cloud, or the area in which bulls and bears have been accumulating their positions. This implies the momentum is moving in favor of the bears, who have been on the back foot since late November of 2025. One small positive is that the lagging span has not yet broken the cloud, suggesting that the trend has not yet shifted though the price action is precarious. For a different look, you can see the daily candle chart in the bottom graph, and it was 1-, 3- and 12-month moving averages as well as the Fibonacci retracement of the move from the Liberation Day low to the early January 2026 highs. The 38.2% retracement, a level which would suggest the bullish move is still intact, comes in at 2351, slightly above the 1-year moving average at 2339. This tells me there is strong support at the 2340-2350 level on this pullback and it may take quite a bit of negative news to break through that level. If it does, the next stop would be the 50% retracement of the move at 2229. A weakening trend for sure, but support from both the lagging span of the Ichimoku, moving averages and Fibonacci levels. 

Ever since Liberation Day, leveraged money has been very short Russell 2000 futures. Small companies are seen to be among the biggest losers from tariffs given the lack of pricing power. Leveraged money had a record short in Russell 2000 futures through the summer of last year. In late 2025 and into early 2026, this short was almost fully covered, providing buying support for the market. Just recently, traders have seen the short starting to build again, though it is still a smaller short than even the average of the past few years. Is there potential selling pressure in small caps should negative news and headwinds persist?

Turning to the volatility markets, it is important to get a gauge of the level of fear priced into the market. One can find this by comparing the risk premium built into the options by looking at the implied less historical volatility spread. These levels trade roughly similarly but implied tends to maintain a small premium to historical because of the insurance value. Lately, however, that risk premium has expanded considerably to almost 15 volatility points, a level traders have not seen in quite some time. This indicates a lot of fear priced into the options market and may suggest a volatility crush regardless of the directional move simply because options are not carrying well. By that I mean market makers will not be able to make back their daily theta bill given the current level of historical volatility. This gives reason to consider ideas that are either flat or even short vega, so an implied volatility crush does not hurt returns. 

The next stop is the implied volatility surface so I can see the skew and kurtosis priced into the markets. I see skew is normal in the sense that puts are trading above calls, and calls are below the at the money. In addition, the 25-delta risk reversal comes in around 8 volatility points, which is about normal for 1 month and shorter expirations. This volatility surface is useful in laying out the deltas/strikes one may want for any spread they create so they can understand how to structure an idea. Seeing that not only is implied volatility for at-the-money options elevated, but it is still more elevated for downside options, tells me that a trader should be careful not to spend too much for downside protection.  

Putting all of this information together, I can find the optimal trade implementation. For this trade, I should first consider an expiration that has a potential catalyst for a lower move. This could be the end of March meeting between presidents Trump and Xi. The March month-end/quarter-end expiration date is also a popular expiration for those who prefer to hedge systematically and not tactically, so there is plenty of liquidity in these options. Next, I should consider a directionally bearish idea because futures prices have perhaps dislocated from the fundamentals of sentiment, interest rates and credit availability. This could lead to selling pressure from leveraged money that is not that short and see futures prices breaking the Ichimoku cloud support. Bulls will defend their turf on the way down with support at the 38.2% Fibonacci retracement level and the 1-year moving average. Since the lagging span has not breached the cloud, the trend is not broken, and bulls will not be quick to give up. 

While the knee-jerk reaction may be to buy puts, I know implied volatility is far too high for the actual historical volatility observed in the market. Long option ideas are not that attractive, but spreads are. Particularly, spreads that allow traders to move into short vega positions in case there is a volatility crush or a curve reset even on a move lower. However, no one wants open-ended downside risk in an environment with a war in the Middle East and the Straits of Hormuz shut down. 

One trade idea fits these themes rather nicely – a Christmas tree put spread, so called because of the shape of the payout diagram. This trade is constructed by buying a higher strike put, selling 3 of the middle strike, and buying 2 of the lowest premium options to define the maximum risk. Because of the asymmetry of the notional amounts, even though the strikes are equidistant, the trade is constructed for zero premium. The downside is that a move to the lower strike would produce the maximum loss. The maximum gain would happen at the middle strike at expiration. 

I used the March month-end/quarter-end expiration and 2425-2325-2225 as the strikes. This means that the trade makes money from 2425 to the downside breakeven at 2274, with the maximum gain at 2325 where there is both moving average and Fibonacci support. If those levels break, the maximum loss of 100 ticks happens at 2225 and below, a risk indeed, but 11% lower than here traders may want to put long risk back on thinking the full correction has happened. 

A trader can use this Christmas tree put spread as a hedge against a long position or can use it tactically as a defined risk way to express a short position that has strong asymmetry of reward to risk at all price levels from 2274 and higher. Since the risk is defined up front, it is a “set it and forget it” idea for the next 2 weeks as traders watch the headline ping pong about the war in the Middle East and the debate about Fed policy post the FOMC meeting. 

Christmas is a time for giving gifts, and the gifts for traders right now may be the pricing of this Christmas tree put spread. 

Good luck trading! 

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