Nine Key Features of the Russell 2000 Index and New Mini-Russell 2000 Index Options (MRUT)
Cboe™ is launching Mini-Russell 2000 Index options (ticker: MRUT) on Monday, March 1, subject to regulatory review. In anticipation of the launch, we’ve compiled a list of nine features that may help investors better understand the Russell 2000 Index and the new Cboe Mini-Russell 2000 Index options. The first three features are below. Read Part 2 and Part 3.
Meeting Large Demand with Mini Products
The number of retail participants in the market grew to nearly 25% in 2020, highlighting the demand for products that offer flexibility and allow new participants to access the market. As retail trading continues to grow, Cboe is developing and launching new and enhanced products that provide accessibility and flexibility for participants managing individual accounts.
The latest product in this line of offerings is Cboe Mini-Russell 2000® Index (MRUTSM) options, which join the ranks of Cboe’s existing Mini-SPX options and Mini-VIX futures. Index options are unique in that they allow investors to express an opinion on market direction, generate income and hedge a portfolio of stocks, rather than simply choosing between being bullish or bearish.
Key Features 1-3
1. Smaller Size with Potential for Greater Precision and Flexibility
Mini-Russell 2000 Index options are structured like standard Russell 2000 Index (RUTSM) options, but with a contract that is one-tenth the size of the standard contract. The mini contract is designed to provide market participants with a more precise way to hedge or gain direct exposure to the Russell 2000 Index. Additionally, the more manageable size makes the mini contract a great choice for sophisticated retail traders and small- or mid-sized institutional investors seeking greater flexibility when managing U.S. small-cap equity market risk and volatility or allocating among accounts. Investors can also customize key contract terms, such as exercise prices, exercise styles, and expiration dates, with Mini Russell 2000 Index FLEX® options.
2. European Style with P.M. Cash Settlement
Mini-Russell 2000 Index options are European style, with no early exercise, meaning the options can only be exercised or assigned at expiration. European-style options eliminate the uncertainty of early exercise, which many traders prefer. Because index options do not pay a dividend, European style also helps investors avoid the potential threat of dividend risk related to upcoming ex-dividend dates. How? As you may know, the ex-dividend date is the first trading day when an ETF or dividend-paying stock's price drops to reflect its next dividend payment. So, if an ETF pays a $0.25 dividend, the price may decline by that amount prior to trading on the ex-dividend date, barring other market factors. If an option is in-the-money going into the ex-dividend date and the dividend exceeds the remaining time value of the option, the call owner likely has economic incentive to exercise their options early. This leaves the seller in the position of having to deliver the shares, as well as the dividend. With no early exercise, Mini-Russell 2000 Index options ensure market participants won’t get stuck paying the dividend.
Additionally, the options are cash-settled, so there’s no unwanted delivery of stocks and the p.m. settlement ensures there’s no overnight risk.
3. Possible 60-40 Tax Treatment
Certain positions may be eligible for 60-40 treatment under Section 1256 of the U.S. Tax Code.* 60-40 tax treatment means that 60 percent of any gains or losses are treated as long-term gains or losses, regardless of how long you hold the contract. The remaining 40 percent is treated as a short-term gain or loss. This unique feature can offer significant after-tax benefits, compared to trading an index ETF or index mutual fund.
Stay tuned for next week’s features post to learn more about the key features of Mini-Russell 2000 Index options, including useful strategies. Follow our Insights page for more.
- Cboe Mini-Russell 2000 Index (MRUT) Options
- Mini-Russell 2000 Index Options Fact Sheet
- Mini-Russell 2000 Index Options Contract Specifications
- Wilshire Associates Whitepaper: The Cboe Russell 2000 Option Benchmark Suite - Improving Diversification by Harvesting Volatility Risk Premiums
- Fund Evaluation Group Study: Evaluating Options for Enhanced Risk-Adjusted Returns: Cboe Russell 2000 Option Benchmark Suite and Case Studies on Fund Use of Options