NEW YORK, July 23 (Reuters) - U.S. small-cap stocks'

long-awaited rally has ignited record trading in options

contracts that would benefit from their persistent strength,

though some strategists say further gains could be limited.

The small-company focused Russell 2000 is up 9% over

the last 10 sessions while the tech-heavy Nasdaq 100 has

slipped 3% over that period in a market rotation fueled by

expectations of interest rate cuts and the improved fortunes of

Republican presidential candidate Donald Trump.

The small-cap rally has been accompanied by a rush into

bullish options. A record 1.35 million call options on iShares

Russell 2000 ETF changed hands daily over the last 10

days, Trade Alert data showed.

The trade has faltered more recently as tech stocks came

roaring back on Monday, and some analysts believe small stocks

may struggle to make further headway after this month's

explosive rally.

Similar rotations have not had much traction the last couple

of years, said Joe Mazzola, director of trading and education at

Charles Schwab.

The Russell 2000's one-week percentage gain outstripped that

of the Nasdaq 100 by at least 5 percentage points only three

times over the last two years. In each instance the tech index

soon regained the advantage, a Reuters analysis showed.

In the most recent example in late 2023, the Russell

2000 climbed 22% from November through December on expectations

of rate cuts, but struggled to advance further when the cuts did

not materialize.

The fundamental macro picture does not point to a sustained

rally and the ongoing earnings season may be a litmus test,

Barclays derivatives strategists said in a note on Tuesday.

Some investors see small caps as a market sector that could

benefit from lower interest rates. Trump's political agenda,

with tariffs on imports and lower taxes, is also broadly viewed

as friendly to smaller companies.

Megacaps Tesla and Alphabet are set to

report earnings later on Tuesday, with positive results having

the potential to sooth investor nerves and reignite the tech

rally.