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The options market is sending an encouraging message for small-cap investors.

Demand for bullish call options tied to the Russell 2000 and an exchange-traded fund that tracks the index has surged over the past few sessions, pushing these contracts to trade at a premium relative to bearish puts, according to Mandy Xu, head of derivatives-market intelligence at Cboe Global Markets.

This signals that the small-cap rally might have room to run, at least in the near term. As Xu pointed out, a similar pattern emerged in late 2023 as investors boosted stocks expected to benefit from aggressive Federal Reserve interest-rate cuts.

The Russell 2000 RUT rallied more than 20% between the beginning of November and start of December, outperforming both the S&P 500 SPX and Nasdaq Composite COMP, FactSet data show.

“We saw this in [the fourth quarter] last year when bullish sentiment in small caps hit an extreme, though ultimately, the trade faded as rate-cut bets were pared back. Will it be different this time?” Xu said in emailed commentary.

Call options grant traders the right to buy shares of the underlying stock or ETF at an agreed-upon price before they expire. Similarly, put options give traders the right to sell. Option contracts tied to an index are usually settled in cash.

Trading volume for calls tied to both the Russell 2000 and the iShares Russell 2000 ETF IWM hit their highest level in years on Thursday, Dow Jones Market Data show. Nearly 2.1 million calls tied to the ETF changed hands that day, the highest daily turnover since December 2009 and the sixth-highest on record going back to 2005. Call options tied directly to the index saw their heaviest volume since 2021.

Thursday marked the Russell 2000’s best session since November, data show. Small caps soared following a softer-than-expected reading on inflation from the June CPI report, which helped revive expectations that the Fed will cut interest rates in September.

The small-cap index outperformed major rivals like the S&P 500 and the Nasdaq. Compared with the S&P 500, small caps saw their most dramatic outperformance since March 2020, when the onset of the COVID-19 pandemic sent a shockwave through global markets, according to Cboe data.

Over the past four sessions, the Russell 2000 has gained 7.7% and is on track for its best four-day streak since 2020, Dow Jones Market show. The index is on track to finish at its highest level since January 2022.

Demand for bullish call options has remained elevated since Thursday. Trading volume in call options tied to the iShares ETF remained more than triple the daily average from the past two years on Friday and Monday, data show.

The call-put volume ratio, which compares activity in bullish calls to bearish puts, also remained above average.

The Russell 2000 was up 2.1% on Monday at 2,194, while the S&P 500 was up 0.1% at 5,619. The Nasdaq was up 0.1% at 18,415.

The Dow Jones Industrial Average DJIA was up 157 points, or 0.4%, at 40,281.