Russell 1000® Growth & Value Index Options
The CBOE recently launched options on the followed Russell 1000®, Growth, & Value Indexes.
- The Russell 1000 (Ticker: RUI) measures the performance of the large-cap. segment of the U.S. equity market.
- The Russell 1000 Growth Index (Ticker: RLG) measures the performance of Russell 1000 Index companies that carry a higher price-to-book ratios and forecasted growth values.
- The Russell 1000 Value Index (Ticker: RLV) measures the performance of Russell 1000 Index companies with a lower price-to-book ratio and lower expected growth.
Performance Differences – Russell 1000 Growth vs. Value Index:
Equity markets trade through cycles of high and slow growth as evidenced by leadership changes. The performance of the style indexes, Russell 1000 Growth & Value experienced dramatic differences in returns as seen in years 2000, 2004, 2006, 2007, & 2009.
Over an extended period, the Russell 1000 Value outperformed Russell 1000 Growth Index. However, within the past 5 years the cumulative returns of Russell 1000 Growth is higher than that of the Value Index.
Russell 1000 Growth & Value Cash-Settled Index Options:Altering the weightings between the equities benchmarked to the Russell 1000 Growth & Value Indexes can improve the cumulative return rather than simply holding a large-cap. portfolio benchmarked to the Russell 1000 Index. Portfolio tilting is widely used to improve risk adjusted returns. As seen below, adjusting the asset weightings during the same time period, a tilt towards (70% Russell 1000 Growth Index and 30% Russell 1000 Value Index) improved the cumulative return relative to the Russell 1000 Index by over 1.63%.
Tilted portfolios constructed to achieve higher adjusted returns will require occasional rebalancing when the weightings become misaligned. Rebalancing can be accomplished in a variety of ways including the use of cash-settled index options.
Options on the Russell 1000 Growth (RLG) and Value (RLV) Index Options are an effective tool for fine tuning asset weightings by writing a call or put when the underlying assets approach the outer bands of the targeted weightings. To illustrate, if a market rally causes the underlying Growth position to rise above 73% which is above the targeted 70% level. Writing call options on Russell 1000 Growth Index (RLG) using a 3% notional value can effectively realign weighting to the proper level. Alternatively, when Growth reaches 67% which is below the targeted level writing put options on the Russell 1000 Growth Index will also help realign positons to the proper level.
Russell 1000 Growth & Value Index options offer several benefits:
- Large Size Notional Value – lower commissions
- European Exercise – removes the risk of early assignments
- 60/40 Tax treatment – Under section 1256 of the Tax Code the profit & loss on trading this option are entitled a tax rate equal to 60% long-term and 40% short term.
For further information on the Russell 1000 Family cash-Settled Index Options please visit:
Post written by Rick Rosenthal, CBOE Business Development