CBOE applies to launch mini options on the Russell 2000 index

Darren Sinden

The retail-friendly CBOE is keen to capture a bigger slice of the pie. On top of the 51% volume growth, it has enjoyed in the space over 2020

MetaTrader 5 advances its hedging functionality

CBOE Global Markets a leading exchange operator based in North America has announced it is to launch new options on the Russell 2000 index.

The options will be launched in a so-called Mini form that offers smaller trade sizes but also more flexibility when it comes to tailoring hedges and other trades linked to specific portfolios.

The introduction of the options, which is subject to regulatory approval, would continue the recent trend of introducing derivative contracts with smaller notional values that appeal to a wider audience of traders not just institutions and professionals.

The Russel 2000 index has an emphasis on small and medium-sized US companies though those labels often have to be taken with a metaphorical pinch of salt.

For example, the market cap of its median constituent is at just under $800 million whilst the largest index constituent is capitalised at $13.05 billion. The average Russell 2000 constituent is weighted in the index at a market cap of $2.973 billion. The index has been calculated since January 1984 and has some $2.40 trillion of assets benchmarked to it.

If approved the new options would have the ticker MRUT and will have a contract size one-tenth the size of the standard Russell 2000 index options.
Which will make them comparable to and competitive with options over ETFs that track the index.

If all goes to plan the new CBOE options should be up and running by the end of Q1 2021. They will be introduced as European style options meaning there will be no exercise before the expiry date and as is the case with most equity index derivatives they will be CFDs. That is settled for cash rather than by delivery of the underlying index constituents.

Full-size options in the Russell 2000 index were first introduced on the CBOE back in 1992 and the contracts are one of the top five most liquid cash-settled equity index derivatives in the USA. Trading an average of 34,000 lots per day and with an open interest of more than 822,000 lots at the time of the announcement.

The CBOE will hope to attract new traders to the market with the smaller options and will presumably be trying to entice traders away from options on ETFs which are effectively second derivatives and into something that is priced directly against the index itself.

Interest among retail clients in equity index, equity-linked and single name equity options trading has ballooned in the US during 2020. The retail-friendly CBOE is keen to capture a bigger slice of the pie. On top of the 51% volume growth, it has enjoyed in the space over 2020, according to research from US brokers Piper Sandler.

However much of this growth in options trading on US exchanges this year has focused on high-risk strategies that use short-dated options which amount to little more than leveraged directional bets. That may be fine if you are long and you understand the risk of loss. However, it may be not so fine if you are short puts or calls, or have complex combination trades which can have a very volatile risk profile in the run-up to expiry.

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