Article / 07 July 2017 at 15:04 GMT

Product Focus: How to trade 'America First' with Russell 2000 futures

Product Manager, Options Trader, Educator
  • CME Group to launch E-mini Russell 2000 index futures and options on July 10
  • Saxo Bank will list these during the European session on Monday
  • Russell 2000 Index is a small-cap stock index measuring performance of 2000 firms
  • Futures and options on the Russell 2000 provide new opportunities for traders

By Georgio Stoev

US small-cap stocks have gone largely unnoticed by global investors, but the Trump administration's "America First" doctrine has given smaller companies a boost, and futures and options on the widely watched Russell 2000 small-cap index could offer new opportunities for trading and portfolio hedging.

On July 10, the world's largest derivatives marketplace, the CME Group, will launch futures and options based on the Russell 2000® Index. Saxo Bank will list these instruments during European working hours on Monday. 

Here is some additional information on the sector and the contracts:

What is the Russell 2000 Index? 

The Russell 2000 Index is a small-cap stock market index and is used to measure the performance of 2000 publicly traded US companies. The "cap" (or capitalisation) can vary from tens of millions to five-ten billion dollars. Some of the top constituents are well-known companies, such as Advanced Micro Devices, Take Two Interactive and Alaska Air, while others are off the radar, such as Aspen Technology and Cal-Maine Foods. The index is a registered market of FTSE Russell, a product of recent the acquisition by the London Stock Exchange. More information could be found here.

SP500 vs RU

Source: CME Group

Return of the Russell 2000

In 2008 Intercontinental Exchange (ICE), another exchange operator, took over the licensing agreement from the Russell Investment Group and housed the contracts until this year. The CME Group now has the exclusive rights to list futures and options on the index staring July 10, or, technically speaking, the night of July 9. 

During this transition period, the contracts will have a dual listing by ICE and now by CME. The reason for the cross-exchange presence is that there's still some open interest in the futures contracts that have been opened by market participants using the ICE complex, and these would need to be closed using the same facility.

The CME is looking to list the following contracts:

  • E-mini Russell 2000 Index (RTY)
  • Expiration months - MAR, JUN, SEP, DEC (H, M, U, Z)
  • Options on E-mini Russell 2000 Index futures
  • Weekly options on the E-mini Russell 200 Index futures
  • Options on E-mini Russell 2000 Index futures (end-of-month)
  • E-mini Russell 2000 Growth Index futures
  • E-mini Russell 2000 Value Index futures

The contract size remains the same $50 x Russell 2000 Index, with a dollar value of one full tick equal to $5. For further information please visit the CME Group's site. The margin requirement for the underlying futures has been set by ICE at $3,690, and we are yet to confirm what the CME will require. 

Who could benefit from this product?

Small-cap companies are typically at the forefront of growth and innovation, domestically and globally. Due to their smaller size they have the flexibility to adjust to new regulatory or market environments. So they do tend to outperform during economic expansions. Conversely, due to their limited access to capital and higher costs as a result, their multiples tend to be higher. The current price/earnings ratio ex-dividends is 26.75, compared with 21 times for the S&P 500. Smaller firms are also more vulnerable to increases in interest rates, changes in fiscal policies and regulations. 

S&P 500 vs Russell 2000 daily chart 
 Source: Saxo Bank

The two asset classes — growth and value — could provide greater flexibility in terms of diversification among investors depending on the economic cycle. As seen above, the top sector in the Russell 2000 Index is financials. There are over 7,000 banks in the US, and most of them could get a boost in a rising interest rate environment. In addition, the underlying futures and options could be used to hedge a portfolio of smaller-cap holdings. 

Have a great weekend.

— Edited by John Acher

Georgio Stoev is futures and options product manager at Saxo Bank 

chi2015 chi2015
This is a very thorough article on a contract that is a great trade, nice job GS
ashrafj1 ashrafj1
thanks Georgio , do you have a recommendation trade in that option or index
Always informative with good articles and information from Georgio!
Vatsid Vatsid
Very informative and timely!
Georgio Stoev Georgio Stoev
We will look at some trade set ups once the contacts are on the platform and build up some liquidity.
Georgio Stoev Georgio Stoev
Futures contracts are now on the Saxo platform with September and December expirations (RTYU7 and RTYZ7)
Georgio Stoev Georgio Stoev
Now trading - on its debut the RTYU7 traded 2658 contracts on the Globex platform.


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