This is a big week for the FTSE Russell suite of indexes. On Friday, a large number of indexes will undergo what is referred to as the annual reconstitution. Specifically, the final phase of this process will occur on the market close Friday as stocks move into or out of indexes. The index we care most about at CBOE is the Russell 2000 which is the standard benchmark index for small cap managers in the US. Also, RUT options are the 3rd most actively traded broad based index option market at CBOE.
Since CBOE is the home to Russell 2000 option trading I like to focus on how the reconstitution process impacts volatility associated with RUT. Specifically, the implied volatility of RUT options and the realized volatility of the Russell 2000 index during June.
First, I took the average for the CBOE Russell 2000 Volatility Index (RVX) for each month from 2004 through 2016. The bar chart below shows the average by month for the implied volatility of RUT options with June highlighted in red. The average RVX daily close in June ranks eight out of twelve months. This means not only is anticipated volatility not high, but it is actually lower than average in June.
Second, I calculated average realized volatility for the Russell 2000 by month over the same time period. Again, June is highlighted in red below and the average realized volatility in June ranks below average. Specially, June realized Russell 2000 realized price volatility ranks seventh out of twelve months.
FTSE Russell has the reconstitution process down to a smooth and transparent methodology. You can learn more about how this works at the FTSE Russell website which includes all information about how this process works along with an short informational video giving an overview of the reconstitution process.