Russell 2000® Index Options - RUT

Russell 2000 Index Options - RUT

On January 5 2005, CBOE listed options based on one-tenth of the value of the Russell 2000 Index. The Mini-Russell 2000 Index (ticker symbol RMN) is based on 1/10th the value of the Russell 2000 Index. The Russell 2000 Index (ticker symbol RUT) is designed to measure the performance of the bottom 2,000 companies from a universe of the 3,000 largest stocks in the U.S., which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

CBOE formulated reduced-value options on the Russell 2000 Index in response to investor demand for smaller, retail-sized, index options with point-and-click functionality. Mini-Russell 2000 (RMN) options trade on the CBOE Hybrid Trading System.

Bullish on the Mini-Russell 2000
Example: CBOE lists options based on 1/10th the value of the Russell 2000 Index®, or Mini-Russell 2000 Index Options (RMN). Representing 2,000 companies, Russell 2000 options are considered a benchmark of the U.S. small-capitalization market. In this example, RMN is at a level of 60.
Outlook: Small cap stocks have had a great run in the past few months, and you are bullish through mid 2005. You believe they are undervalued in comparison to the broader marketplace and expect a 12.5% increase in the first half of the year. You want to establish a bullish position at a reduced cost with limited risk, and are willing to give up upside past 12.5%.
Possible Strategy: Call Spread.
Buy 10 RMN June 60 calls at 3.40.
Sell 10 RMN June 67.50 calls at 1.05.
Net cost of $2.35 each, or $2,350.

*All values shown are at the time of expiration.
Index Change RMN @ exp. Long 60 call value Short 67.50 call value Spread Value Spread Cost Net Profit/(Loss)
+ 16.67%70 $10,000.00 $2,500.00 $7,500.00 ($2,350.00) $5,150.00
+ 12.50% 67.50**** $7,500.00 $0.00 $7,500.00 ($2,350.00) $5,150.00
+ 3.92% 62.35* $2,350.00 $0.00 $2,350.00 ($2,350.00) $0.00
+/- 0.00% 60**/*** $0.00 $0.00 $0.00 ($2,350.00) ($2,350.00)
-5.00% 57 $0.00 $0.00 $0.00 ($2,350.00 ($2,350.00)


At Expiration (06/18/05)
* Break-even: RMN @ 62.35 (+3.92%)
** Unchanged: Loss of $2,350
*** Max Loss: $2,350 if RMN < or = 60 (+/- 0.00%)
**** Max Gain: $5,150.00 if RMN > or = 67.5 (+ 12.50%)


In Short: $2,350 initial investment has the possibility of returning a maximum of $5,150 profit if RMN has increased 12.5% or more at expiration. The maximum risk is equal to initial investment of $2,350. Note: RMN options are European Exercise, AM Settlement.