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.
*All values shown are at the time of expiration.
|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.
At Expiration (06/18/05)
|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)
* 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%)
$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.
Options involve risk and are not suitable for all investors. Prior to buying or selling options, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. The information in these materials is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in these materials. No statement within these materials should be construed as a recommendation to buy or sell a security or to provide investment advice. Any strategies discussed, including examples, do not include commissions, dividends, margin, taxes, and other transaction costs. However, these costs will affect the outcome of transactions and should be considered. S&P 100 and S&P 500 are registered trademarks of the McGraw-Hill Companies, Inc., and are licensed for use by the Chicago Board Options Exchange, Inc. (CBOE). The "Russell 2000 Index is a registered trademark of Frank Russell Company. The Nasdaq 100 is a registered mark of The Nasdaq Stock Market, Inc. "Dow JonesSM", Dow Jones Industrial AverageSM", "Dow Jones Transportation AverageSM," and "Dow Jones Utility AverageSM" are service marks of Dow Jones & Company, Inc. and have been licensed for certain purposes by the CBOE. LEAPS, FLEX, FLexible EXchange, CBOE, Chicago Board Options Exchange and OEX are registered trademarks of CBOE, and Long-term Equity AnticiPation SecuritiesTM and SPXTM are trademarks of the CBOE.
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