Russell 1000 index options are option contracts in which the underlying value is based on the level of the Russell 1000, a stock market index that measures the performance of the large-cap segment of the U.S. equity market and its membership includes approximately 1000 of the largest securities representing about 92% of the U.S. market.
The Russell 1000 index option contract has an underlying value that is equal to the full value of the level of the Russell 1000 index. The Russell 1000 index option trades under the symbol of RUI and has a contract multiplier of $100.The RUI index option is an european style option and may only be exercised on the last business day before expiration.
|Product Name||Symbol||Underlying Value||Contract Multiplier||Exercise Style|
|Russell 1000 Options||RUI||Full Value of Russell 1000||$100 |
(Full Contract Specs)
If you are bullish on the Russell 1000, you can profit from a rise in its value by buying Russell 1000 (RUI) call options. On the other hand, if you believe that the Russell 1000 index is poised to fall, then RUI put options should be purchased instead.
The following example depict a scenario where you buy a near-money RUI call option in anticipation of a rise in the level of the Russell 1000 index. Note that for simplicity's sake, transaction costs have not been included in the calculations.
You observed that the current level of the Russell 1000 index is 443.49. The RUI is based on the full value of the underlying Russell 1000 index and therefore trades at 443.49. A near-month RUI call option with a nearby strike price of 440 is being priced at $29.57. With a contract multiplier of $100.00, the premium you need to pay to own the call option is thus $2,957.00.
Assuming that by option expiration day, the level of the underlying Russell 1000 index has risen by 15% to 510.01 and correspondingly, the RUI is now trading at 510.01 since it is based on the full value of the underlying Russell 1000 index. With the RUI now significantly higher than the option strike price, your call option is now in the money. By exercising your call option, you will receive a cash settlement amount that is computed using the following formula:
Cash Settlement Amount = (Difference between Index Settlement Value and the Strike Price) x Contract Multiplier
So you will receive (510.01 - 440.00) x $100 = $7,001.35 from the option exercise. Deducting the initial premium of $2,957.00 you paid to buy the call option, your net profit from the long call strategy will come to $4,044.35.
|Profit on Long RUI 440 Call Option When Russell 1000 at 510.01|
|Proceeds from Option Exercise||=||Cash Settlement Amount|
|=||(Index Settlement Value - Option Strike Price) x Contract Size|
|=||(510.01 - 440.00) x $100|
|Investment||=||Initial Premium Paid|
|Net Profit||=||Proceeds from Option Exercise - Investment|
|=||$7,001.35 - $2,957.00|
|Return on Investment||=||Net Profit / Investment|
In practice, it is usually not necessary to exercise the index call option to take profit. You can close out the position by selling the RUI call option in the options market. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.
In the example above, as the option sale is performed on expiration day, there is virtually no time value left. The amount you will receive from the RUI option sale will still be equal to it's intrinsic value.
One notable advantage of the long Russell 1000 call strategy is that the maximum possible loss is limited and is equal to the amount paid to purchase the RUI call option.
Suppose the Russell 1000 index had dropped by 15% instead, pushing the RUI down to 376.97, which is way below the option strike price of 440. Now, in this scenario, it would not make any sense at all to exercise the call option as it will result in additional loss. Fortunately, you are holding an option contract, and not a futures contract, and so you are not obliged to anyway. You can just let the option expire worthless and your total loss will simply be the call option premium of $2,957.00.
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