RLS and RUT and the Russell 2000

Written on March 24, 2008 by OptionsRopeaDope

This is actually a follow up from an earlier article on the RUT and RLS I wrote. Be sure to read it if you wonder why things get screwy on expiration day.

In short, most open-cry options (RUT, SPX, NDX, and others) close trading on the day before expiration day (that is, Thursday, 4:30 most months.) The understanding is, the settlement price is the opening price on Friday morning. However, the actual price that RUT options are evaluated against is not the Russell 2000 at all, but another index altogether - the RLS. The RLS uses the opening prices for all the Russell 2000 companies to get it’s price for the day. In some cases, that means the settlement price for the RLS, and for RUT options, is actually a price outside the trading range for the Russell 2000 altogether!

There are several examples of this, including in the other post linked above. The lesson? Don’t ever hold short RUT (or SPX, or NDX) options and let them expire worthless. Because they just might not do so, and trust me, you’ll feel like you got kicked in the head when it happens.

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    • Category Posted in Mistakes, Trading Rules, RUT

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