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Good times may be around the corner for small-cap investors.

Zhitong Finance APP learned that according to Mandy Xu, head of derivatives market intelligence at Cboe Global Markets, demand for call options related to the Russell 2000 Index and exchange-traded funds (ETFs) tracking the index has surged in the past few trading days, driving these contracts to trade at a premium relative to put options.

That suggests the rebound in small-cap stocks may have room to run in the near term. Xu noted a similar pattern in late 2023, when investors pushed up stocks expected to benefit from aggressive rate cuts by the Federal Reserve. The Russell 2000 rose more than 20% between early November and early December, outperforming the S&P 500 and Nasdaq Composite, according to FactSet data.

“We saw in the fourth quarter of last year that bullish sentiment in small-cap stocks reached extreme levels, but eventually the trade faded as expectations of rate cuts diminished,” Xu said. “Will this time be different?”

A call option gives traders the right to buy the underlying stock or ETF at an agreed-upon price before the option expires. Similarly, a put option gives traders the right to sell. Index-related option contracts are usually settled in cash.

Dow Jones Market Data showed that trading volume for call options tied to the Russell 2000 Index and the iShares Russell 2000 ETF reached its highest level in recent years last Thursday. Nearly 2.1 million call options tied to the ETF changed hands that day, the highest daily volume since December 2009 and the sixth highest since 2005. Trading volume for call options directly tied to the index reached its highest level since 2021.

Data shows that last Thursday was the best day for the Russell 2000 index since November last year. Since that day, demand for call options has remained high. Data shows that last Friday and Monday, call option trading volume related to iShares ETFs was still more than three times the daily average volume of the past two years.

The call-put volume ratio, which compares call option activity to put option activity, also remained above average.

On Monday, the Russell 2000 rose 2.1% to 2,194, while the S&P 500 rose 0.1% to 5,619. The Nasdaq rose 0.1% to 18,415. The Dow Jones Industrial Average (DJIA) rose 157 points, or 0.4%, to 40,281.