Cboe Global Markets

Nine Key Features of the Russell 2000 Index and New Mini-Russell 2000 Index Options (MRUT), Part 3

February 24, 2021

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. This is the third post in a three-part series. Read about the first three features, here, and Features 4-6, here. The final three features are below.

Options Strategies Using Mini-Russell 2000 Index Options

7.  Volatility Skew and Vertical Spread Strategies Using Mini-Russell 2000 Index Options

The chart below shows the estimated 30-day implied volatility and negative skewness for Russell 2000 Index options on January 20 and February 1. The 30-day implied volatility for out-of-the-money (OTM) puts was generally higher than the implied volatility for at-the-money (ATM) options and OTM call options. The Vertical Put Spread strategy involves selling a put while simultaneously buying another put at a different strike price, but with the same expiration. This strategy may be appealing to investors who are intrigued by the negative skewness often seen in index options. 

Volatility SKEW for Russell 2000 Index (RUT) Options

Source: Estimates by Cboe Options Institute

8.  Term Structure and Calendar Spread Strategies Using Mini Russell 2000 Index Options

The chart below shows the implied volatility on February 1 for the OTM 2050 RUT put options at 24 different expiration dates between February 5, 2021 and December 15, 2023. On February 1, the Cboe Russell 2000 Volatility Index (RVX) closed at 35.33, 11 volatility points above its long-term average. Additionally, the term structure chart was downward sloping, meaning the near-term index options had higher implied volatilities than the longer-dated options. There are often long-term trends in which volatility is mean-reverting and relatively steep slopes in the term structure may become flatter. Options investors who expect a change in a steep term structure in the near future may use a calendar spread, which involves buying and selling call options or put options with the same strike price but different expiration dates.

Russell 2000 Index (RUT) Options Term Structure

On February 2, 2021 for out-of-the-money 2050 RUT puts with the cash index at 2126.16

Source: Estimates by Cboe Options Institute

9.  Rotation Between Large-Cap and Small-Cap Indices, Directional Options Trades

Many segments of the worldwide economy were severely challenged by stay-at-home orders related to the COVID-19 pandemic. As shown in the heat map below, in March 2020 the small-cap Russell 2000 Index declined 21.7%, 8.5 percentage points worse than the large-cap Russell 1000 Index. However, the Russell 2000 Index outperformed the Russell 1000 Index in every month since September 2020. In November 2020, the Russell 2000 Total Return Index (pre-tax) rose 18.4%, the largest one-month gain in its history. Investors who have a strong opinion about how small-cap stocks will perform may use a directional strategy to incorporate their view of the small cap market into their options trading.

Small-Cap and Large-Cap Indices Since Year-End 2019

Source: Cboe Options Institute

Why have the performances of the Russell 1000 and Russell 2000 indices diverged over the past year? It may be because the indices have different weightings for key industries. As depicted below, the Russell 1000 Index’s weighting for the Technology industry is much higher (28%) than the Russell 2000 Index’s (12%).  

Industries for Small-Cap and Large-Cap Indices

Source: Cboe Options Institute | ICB Industries on January 29, 2021

More Strategies to Explore

  • Vertical Put Spreads Using Mini-Russell 2000 Index Options
  • Calendar Spreads Using Mini-Russell 2000 Index Options
  • Directional Strategy Using Mini-Russell 2000 Index Options

 The Wilshire whitepaper, The Cboe Russell 2000 Option Benchmark Suite - Improving Diversification by Harvesting Volatility Risk Premiums (2020) analyzes the performance of these indices and strategies. Download a copy.

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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. Cboe is a registered trademark of Cboe Exchange, Inc. © 2021 Cboe Exchange, Inc. All Rights Reserved.