New Cash-Settled Options on Russell 1000 Indexes – Large-cap, Growth and Value

(My colleague Rick Rosenthal contributed text to this blog; Rick focuses on CBOE options on FTSE-Russell indexes).

On October 20 CBOE launched new cash-settled options on three indexes –

  • Russell 1000® Index (RUI) – is preferred by many investment managers as a broad-based index that represents approximately 92% of the total U.S. equity market.
  • Russell 1000® Growth Index (RLG) – measures the performance of those Russell 1000 companies determined to have higher price-to-book ratios and higher forecasted growth values.
  • Russell 1000® Value Index (RLV) – measures the performance of those Russell 1000 companies determined to have a lower price-to-book value and lower expected growth values.

Key Features and Potential Advantages for New Index Options

For certain investors the three new index options have key features that have the potential to be advantageous, including –

Large Contract Size. The new index options have $100 multiplier with large notional sizes that are approximately ten times the size of comparable ETF options.

European-Style Exercise. With European-style exercise, there is no risk of early assignment such as for dividends.

Cash-settlement. There is no unwanted delivery or assignment of shares.

Tax Treatment. Under section 1256 of the U.S. Tax Code, profit and loss on transactions in certain exchange-traded index options, may be entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided that the investor involved and the strategy employed satisfy the criteria of the U.S. Tax Code.

Portfolio Management Strategies. CBOE lists cash-settled index options to provide tools for asset allocation, income generation, managing risks and volatility, and other portfolio management strategies.

Unique Annual Changes for the Indexes

In the table below, note that: (1) in the years 2006, 2007, and 2009, the differences between the RLG and RLV indexes were more than ten percentage points each year, and (2) the CBOE Russell 2000 Volatility Index (RVX) often moved in the opposite direction when compared to the three stock indexes.

mmm1

Correlations

Note that the correlations of monthly returns were 0.94 for the RLG and RLV indexes, and negative 0.64 for the RLV and RVX indexes.mmm2

More Information

To learn more about the new index options, please visit www.cboe.com/RUI, www.cboe.com/RLG and www.cboe.com/RLV.