Opportunities to Harvest Volatility During the Annual Russell Reconstitution
June marks the 33rd Annual Russell Reconstitution, which is the process of determining which constituents will be added or deleted from their respective U.S. Russell Indices. The annual reconstitution leads to a surge in trading, presenting unique opportunities for market participants to leverage Cboe’s Russell 2000 Index options products.
What is Russell Reconstitution?
FTSE Russell Indices are reconstituted over a multi-week process in accordance to its benchmark methodology on an annual basis. The reconstitution reflects changes from the preceding year by adding and removing shares of companies to the U.S. Russell Indices. A vast majority of the listed U.S. equity market is represented by the widely followed Russell 3000 Index, which includes the subset benchmarks Russell 1000 Index (large-caps) and Russell 2000 Index (small-caps).
FTSE Russell evaluates the publicly traded U.S. companies and ranks the largest companies to be included within the Russell’s cap-weighted indices and subsequently revaluated for investment style indices. The process begins with the preliminary Russell U.S. reconstitution portfolio, followed by a weekly series of a preliminary list of companies up for consideration to be added to or removed from Russell Indices. Finally, the largest 3,000 companies become constituents within the Russell 3000 Index. Those companies are then segmented by market capitalization to be assigned to either the Russell 1000 Index or Russell 2000 Index, within their respective cap-weighted bandings.
The 2021 Russell Reconstitution
This year, 227 companies are anticipated to join the Russell 2000 Index and 43 are expected to be removed. FTSE Russell communicates the preliminary reconstitution portfolio throughout the month and will share updates on June 11, June 18 and June 25. With more than $9 trillion in assets benchmarked to the U.S. Russell Indices, the rebalancing of portfolios, which falls on June 25, typically results in the largest trading day of the year.
Volatility and the Russell 2000 Index
Despite Russell Reconstitution’s impact on trading activity, over the last 5 years the Russell 2000 Index’s implied volatility as measured by Cboe’s Russell 2000 30-day Volatility Index (RVX) has been at the lowest average range during the month of June.
Source: Cboe Global Markets
Additionally, the Russell 2000 Volatility Index (RVX) measured slightly below the average in May and June between 2004 and 2020.
During this period of low volatility, market participants are presented with a unique opportunity to leverage options on the Russell 2000 Index (RUT™) using a variety of trading strategies to harvest volatility:
- Covered Writes
- Cash Secured Put Writes
- Credit Spreads
Additionally, Cboe’s recently listed options on the Mini-Russell 2000 Index (MRUT) valued at 1/10 the size of the Russell 2000 Index. Now with a Monday, Wednesday, and Friday expirations, both Russell 2000 Index options and Mini-Russell 2000 Index options offer greater flexibility and precision for market participants to capture theta during this period of low volatility and the final stage of the Russell Reconstitution.
Learn More about Russell Index Options and the Russell Reconstitution:
- Russell 2000 Index (RUT)
- Russell 1000 Index (RUI)
- Russell 1000 Growth Index (RLG)
- Russell 1000 Value Index (RLV)
- Cboe Russell 2000 Volatility Index (RVX)
- FTSE Russell Reconstitution
The information in this article is provided for general education and information purposes only. No statement(s) within this article should be construed as a recommendation to buy or sell a security or to provide investment advice. Supporting documentation for any claims, comparisons, statistics or other technical data in this article is available by contacting Cboe Global Markets at www.cboe.com/Contact. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of “Characteristics and Risks of Standardized Options.” Copies are available from your broker or from The Options Clearing Corporation at 125 South Franklin Street, Suite 1200, Chicago, IL 60606 or at www.theocc.com. Past Performance is not indicative of future results. RUT is a registered trademark of Cboe Exchange, Inc. All other trademarks and service marks are property of their respective owners. © 2021 Cboe Exchange, Inc. All Rights Reserved."