Exploring the Benefits of Small-Cap Stocks and MRUT Options
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.
- Cboe Mini-Russell 2000 Index (MRUT) Options
- Mini-Russell 2000 Index Options Fact Sheet
- Mini-Russell 2000 Index Options Contract Specifications
- The Cboe Russell 2000 Option Benchmark Suite - Improving Diversification by Harvesting Volatility Risk Premiums
- Evaluating Options for Enhanced Risk-Adjusted Returns: Cboe Russell 2000 Option Benchmark Suite and Case Studies on Fund Use of Options
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