Cboe Global Markets

Exploring the Benefits of Small-Cap Stocks and MRUT Options

Matt Moran
September 27, 2021

Cboe’s Mini-Russell 2000 Index (MRUTSM) options are structured like standard Russell 2000 Index (RUTSM) options but feature a smaller contract that is one-tenth the size of the standard contract, making them the same size as comparable ETF options. The smaller notional value of 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. We’re explore use cases and strategies that may be beneficial to both new and more experienced options traders.

Key features of Mini-Russell 2000 Index options:

  • Cash-settlement, with no delivery of stocks
  • European-style, with no early exercise and avoidance of the potential threat of dividend risk related to upcoming ex-dividend dates
  • PM settlement, with no overnight price risk (gap) for the settlement
  • Expirations on Mondays, Wednesdays and Fridays
  • Tax Advantages, Certain positions may be eligible for 60-40 treatment under Section 1256 of the U.S. Tax Code.

Russell 2000 Index Performance

The Russell 2000 Index rose 39% between December 2019 and August 2021. Additionally, the index was more volatile than the S&P 500 Index. It’s worth noting that the S&P 500 Index has higher weighting of technology stocks, which overall had a strong performance during that time frame.

S&P 500 and Russell 2000 Indices Over 20 Months

Source: Cboe Global Markets

Additionally, in November 2020, the Russell 2000 Index rose 18.4%, its highest ever one-month rise. The Index continued to see strong monthly returns through February 2021 and grew slightly through June 2021.

S&P 500 and Russell 2000 Indices Monthly Returns

Source: Cboe Global Markets

Growth in Volume for Russell 2000 Index Options

The average daily volume (ADV) for Russell 2000 (RUT) Index options grew 50% from May 2021 to August 2021. Volume in Russell 2000 Index options grew as market participants sought to capture the historic highs of the underlying small-cap index. Mini-Russell 2000 Index options provide participants with similar exposure to the Russell 2000 Index with the added benefit of a smaller contract size.

Russell 2000 Index Options Average Daily Volume

Source: Cboe Global Markets

Lower Volatilities for Certain Strategies That Use Russell 2000 Index Options

Over a 15-year period, certain strategies that use Russell 2000 Index options had lower standard deviations than comparable strategies and indices. Notably, the Cboe Russell 2000 Buffer Protect Index Balanced Series (RPRO), Cboe Russell 2000 PutWrite Index (PUTR) and Cboe Russell 2000 BuyWrite Index (BXR) all had lower standard deviations than the MSCI EAFE Index and the S&P GSCI.

Standard Deviations from February 28, 2006 to August 31, 2021

Source: Zephyr and Cboe Global Markets

Volatility Skew for Mini-Russell 2000 Index Options

Over the course of 15 expiration dates, Mini-Russell 2000 Index options had higher implied volatilities for out-of-the money puts, as illustrated in the volatility skew chart below.

Mini-Russell 2000 Index Options Volatility Skew

Source: Cboe LiveVol Pro

Strategy Idea: Vertical Put Spread

The Vertical Put Spread strategy may be a useful approach for market participants who are intrigued by the skewness often seen in index options. The strategy involves selling a put and simultaneously buying another put at a different strike price, but with the same expiration. The Vertical Put Spread strategy has the potential to be profitable in bear or bull markets.

Additional Resources


General

  • The information provided is for general education and information purposes only. No statement provided should be construed as a recommendation to buy or sell a security, future, financial instrument, investment fund, or other investment product (collectively, a “financial product”), or to provide investment advice.
  • In particular, the inclusion of a security or other instrument within an index is not a recommendation to buy, sell, or hold that security or any other instrument, nor should it be considered investment advice.

 Options

  • Options involve risk and are not suitable for all market participants. Prior to buying or selling an option, a person should review the Characteristics and Risks of Standardized Options (ODD), which is required to be provided to all such persons. Copies of the ODD are available from your broker or from The Options Clearing Corporation, 125 S. Franklin Street, Suite 1200, Chicago, IL 60606. 
  • Trading FLEX options may not be suitable for all options-qualified market participants. FLEX options strategies only should be considered by those with extensive prior options trading experience.
  • Uncovered option writing is suitable only for the knowledgeable market participant who understands the risks, has the financial capacity and willingness to incur potentially substantial losses, and has sufficient liquid assets to meet applicable margin requirements. In this regard, if the value of the underlying instrument moves against an uncovered writer's options position, the writer may incur large losses in that options position and the participant’s broker may require significant additional margin payments. If a market participant does not make those margin payments, the broker may liquidate positions in the market participant’s account with little or no prior notice in accordance with the market participant’s margin agreement.

 Futures

  • Futures trading is not suitable for all market participants and involves the risk of loss, which can be substantial and can exceed the amount of money deposited for a futures position. You should, therefore, carefully consider whether futures trading is suitable for you in light of your circumstances and financial resources. You should put at risk only funds that you can afford to lose without affecting your lifestyle.
  • For additional information regarding the risks associated with trading futures and security futures, see respectively the Risk Disclosure Statement set forth in Appendix A to CFTC Regulation 1.55(c) and the Risk Disclosure Statement for Security Futures Contracts.

 VIX® Index and VIX® Index Products

  • The Cboe Volatility Index® (known as the VIX Index) is calculated and administered by Cboe Global Indices, LLC. The VIX Index is a financial benchmark designed to be a market estimate of expected volatility of the S&P 500® Index, and is calculated using the midpoint of quotes of certain S&P 500 Index options as further described in the methodology, rules and other information here
  • VIX futures and Mini VIX futures, traded on Cboe Futures Exchange, LLC, and VIX options, traded on Cboe Options Exchange, Inc. (collectively, “VIX® Index Products”), are based on the VIX Index. VIX Index Products are complicated financial products only suitable for sophisticated market participants. 
  • Transacting in VIX Index Products involves the risk of loss, which can be substantial and can exceed the amount of money deposited for a VIX Index Product position (except when buying options on VIX Index Products, in which case the potential loss is limited to the purchase price of the options).
  • Market participants should put at risk only funds that they can afford to lose without affecting their lifestyles.
  • Before transacting in VIX Index Products, market participants should fully inform themselves about the VIX Index and the characteristics and risks of VIX Index Products, including those described here. Market participants also should make sure they understand the product specifications for VIX Index Products (VIX futures, Mini VIX futures and VIX options) and the methodologies for calculating the underlying VIX Index and the settlement values for VIX Index Products. Answers to questions frequently asked about VIX Index products and how they are settled is available here.
  • Not Buy and Hold Investment: VIX Index Products are not suitable to buy and hold because: 
  • On their settlement date, VIX Index Products convert into a right to receive or an obligation to pay cash.
  • The VIX Index generally tends to revert to or near its long-term average, rather than increase or decrease over the long term. 
  • Volatility: The VIX Index is subject to greater percentage swings in a short period of time than is typical for stocks or stock indices, including the S&P 500 Index.
  • Expected Relationships: Expected relationships with other financial indicators or financial products may not hold. In particular:
  • Although the VIX Index generally tends to be negatively correlated with the S&P 500 Index – such that one tends to move upward when the other moves downward and vice versa – that relationship is not always maintained.
  • The prices for the nearest expiration of a VIX Index Product generally tend to move in relationship with movements in the VIX Index. However, this relationship may be undercut, depending on, for example, the amount of time to expiration for the VIX Index Product and on supply and demand in the market for that product.
  • Mini VIX futures contracts trade separately from regular-sized VIX futures, so the prices and quotations for Mini VIX futures and regular-sized VIX futures may differ because of, for example, possible differences in the liquidity of those markets.
  • Final settlement Value: The method for calculating the final settlement value of a VIX Index Product is different from the method for calculating the VIX Index at times other than settlement, so there can be a divergence between the final settlement value of a VIX Index Product and the VIX Index value immediately before or after settlement. (See the SOQ Auction Information section here for additional information.) 

 Exchange Traded Products (“ETPs”)

  • Cboe does not endorse or sell any ETP or other financial product, including those investment products that are or may be based on a Cboe index or methodology or on a non-Cboe index that is based on investment products trading on a Cboe Company exchange (e.g., VIX futures); and Cboe makes no representations regarding the advisability of investing in such products. An investor should consider the investment objectives, risks, charges, and expenses of these products carefully before investing. Investors also should carefully review the information provided in the prospectuses for these products.
  • Investments in ETPs involve risk, including the possible loss of principal, and are not appropriate for all investors. Non-traditional ETPs, including leveraged and inverse ETPs, pose additional risks and can result in magnified gains or losses in an investment. Specific risks relating to investment in an ETP are outlined in the fund prospectus and may include concentration risk, correlation risk, counterparty risk, credit risk, market risk, interest rate risk, volatility risk, tracking error risk, among others. Investors should consult with their tax advisors to determine how the profit and loss on any particular investment strategy will be taxed.

 Cboe Strategy Benchmark Indices

  • Cboe Strategy Benchmark Indices are calculated and administered by Cboe Global Indices, LLC as described in the methodologies, rules and other information available here using information believed to be reliable, including market data from exchanges owned and operated by other Cboe Companies.
  • Strategy Benchmark Indices are designed to measure the performance of hypothetical portfolios comprised of one or more derivative instruments and other assets used as collateral. Past performance is not indicative of future results. Strategy Benchmark Indices are not financial products that can be invested in directly, but can be used as the basis for financial products or managing portfolios. 
  • The actual performance of financial products such as mutual funds or managed accounts can differ significantly from the performance of the underlying index due to execution timing, market disruptions, lack of liquidity, brokerage expenses, transaction costs, tax consequences and other considerations that may not be applicable to the subject index.

Index and Benchmark Values Prior to Launch Date

  • Index and benchmark values for the period prior to an index’s launch date are calculated by a theoretical approach involving back-testing historical data in accordance with the methodology in place on the launch date (unless otherwise stated). A limitation of back-testing is that it reflects the theoretical application of the index or benchmark methodology and selection of the index’s constituents in hindsight. Back-testing may not result in performance commensurate with prospective application of a methodology, especially during periods of high economic stress in which adjustments might be made. No back-tested approach can completely account for the impact of decisions that might have been made if calculations were made at the same time as the underlying market conditions occurred. There are numerous factors related to markets that cannot be, and have not been, accounted for in the preparation of back-tested index and benchmark information. 

Taxes

  • No Cboe Company is an investment adviser or tax advisor, and no representation is made regarding the advisability or tax consequences of investing in, holding or selling any financial product. A decision to invest in, hold or sell any financial product should not be made in reliance on any of the statements or information provided. Market participants are advised to make an investment in, hold or sell any financial product only after carefully considering the associated risks and tax consequences, including information detailed in any offering memorandum or similar document prepared by or on behalf of the issuer of the financial product, with the advice of a qualified professional investment adviser and tax advisor.
  • Under section 1256 of the Tax Code, profit and loss on transactions in certain exchange-traded options and futures are entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided that the market participants involved and the strategy employed satisfy the criteria of the Tax Code. Market participants should consult with their tax advisors to determine how the profit and loss on any particular option or futures strategy will be taxed. Tax laws and regulations change from time to time and may be subject to varying interpretations.

 General

  • Past performance of an index or financial product is not indicative of future results.
  • Brokerage firms may require customers to post higher margins than any minimum margins specified.
  • No data, values or other content contained in this document (including without limitation, index values or information, ratings, credit-related analyses and data, research, valuations, strategies, methodologies and models) or any part thereof may be modified, reverse-engineered, reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of Cboe.
  • Cboe does not guarantee the accuracy, completeness, or timeliness of the information provided. THE CONTENT IS PROVIDED “AS IS” WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY WITH RESPECT MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
  • Hypothetical scenarios are provided for illustrative purposes only. The actual performance of financial products can differ significantly from the performance of a hypothetical scenario due to execution timing, market disruptions, lack of liquidity, brokerage expenses, transaction costs, tax consequences and other considerations that may not be applicable to the hypothetical scenario.
  • Supporting documentation for statements, comparisons, statistics or other technical data provided is available by contacting Cboe Global Markets at www.cboe.com/Contact.
  • The views of any third-party speakers or third-party materials are their own and do not necessarily represent the views of any Cboe Company. That content should not be construed as an endorsement or an indication by Cboe of the value of any non-Cboe financial product or service described.

 Trademarks and Intellectual Property

  • Cboe®, Cboe Global Markets®, Bats®, BIDS Trading®, BYX®, BZX®, Cboe Options Institute®, Cboe Vest®, Cboe Volatility Index®, CFE®, EDGA®, EDGX®, Hybrid®, LiveVol®, Silexx® and VIX® are registered trademarks, and Cboe Futures ExchangeSM, C2SM, f(t)optionsSM, HanweckSM, and Trade AlertSM are service marks of Cboe Global Markets, Inc. and its subsidiaries. Standard & Poor's®, S&P®, S&P 100®, S&P 500® and SPX® are registered trademarks of Standard & Poor's Financial Services LLC and have been licensed for use by Cboe Exchange, Inc. Dow Jones®, Dow Jones Industrial Average®, DJIA® and Dow Jones Global Indexes® are registered trademarks or service marks of Dow Jones Trademark Holdings, LLC, used under license. Russell, Russell 1000®, Russell 2000®, Russell 3000® and Russell MidCap® names are registered trademarks of Frank Russell Company, used under license. FTSE® and the FTSE indices are trademarks and service marks of FTSE International Limited, used under license. MSCI and the MSCI index names are service marks of MSCI Inc. (“MSCI”) or its affiliates and have been licensed for use by Cboe. All other trademarks and service marks are the property of their respective owners.

Copyright

  • © 2021 Cboe Exchange, Inc. All Rights Reserved.