Russell 2000 Options Can Provide Cushion to Manage Small-Cap Exposure

In 2013 the Russell 2000® Total Return Index rose a strong 38.8%, but since hitting its all-time high on March 4, 2014, the index has dropped 9 percent.

Recent related headlines include  “Will Diving Small-cap Stocks Sink Market?” in USA Today, and “Small-caps’ Slide Reflects a Market in Trouble” at


Let’s consider an investor who holds portfolio with a basket of or fund with small-cap stocks, and the investor is concerned about small-cap exposure but is reluctant to sell the securities because of negative tax consequences.

Key tools that can help investors manage small-cap exposure include options on the Russell 2000 Index, and futures and options on the CBOE Russell 2000 Volatility Index (RVX).

More investors are exploring these tools; average daily volume for Russell 2000 option at CBOE grew from 17,595 in 2012 to 48,707 in Jan.-Apr. 2014, an increase of 177%.

11Russell optios volume chart


As shown in the first two line charts, in 2014 through May 8, the Russell 2000 Total Return Index fell 5.3% and the CBOE Russell 2000 BuyWrite Index (BXR) fell 2.2%.

The BXR is a benchmark index that measures the performance of a theoretical portfolio that sells Russell 2000 Index (RUT) call options every against a portfolio of the stocks included in the Russell 2000 Index.  The index options premiums received by the BXR Index on a monthly can act as a cushion to mitigate impact of a fall in stock prices.

22Russell - 3 charts


The CBOE Russell 2000 Volatility IndexSM (RVXSM) is a key measure of market expectations of near-term volatility conveyed by Russell 2000® stock index option prices. It measures the market’s expectation of 30-day volatility implicit in the prices of near-term Russell 2000 options.  The RVX can serve as a valuable gauge for investors who trade RUT options.

Futures and options on the RVX now are available.  Here are some key features of the RVX that could add to the appeal of RVX future and options –

  • NEGATIVE CORRELATION. The daily price moves for the RVX and RUT indexes have a correlation of negative 0.74 in the period from January 2004 through April 2014.
  • BIG UPSIDE DAILY MOVES. Since January 2005, the RVX Index has had 17 days in which it has jumped more than 20%.
  • BIG MOVE IN 2008.  While many stock indexes and commodity indexes experienced big drawdowns in 2008, the RVX Index rose 67% in 2008.
  • HIGH AVERAGE VALUE.  The average daily closing value of the RVX Index was 26.2 in the period from January 2004 through April 2014.

To learn more about the BXR and RVX indexes and how they can help manage small-cap exposure, please visit and