Options for stock investors. A better way to trade.

New Trade Alert May 9th – IWM Russell 2000 Rotation

New Trade Alert for (IWM)

Russell 2000 Exchange Traded Fund           

Buy IWM July $130.00 Call @$10.00 or less

 


Risk Rating: 3.75     (1 = lowest   5 = highest)

Above Break Even Probability: 51%

Probability of maximum loss: 10%

Place Stop Loss at half of premium paid.


 

Rotation Equation

 

Small Caps with BIG PROFIT POTENTIAL

 

Major markets have seen a rally run with Tech up 30% in the last 52 weeks to lead the way up to record highs almost every day in the last ten sessions.  

 

The broad market barometer S&P 500 has FINALLY taken out the March 1st 2400 high to target 2475 another 4% above based on the tried and true “V” recovery measured move.   

 

That S&P objective would put the performance at PLUS 10% in 2017.

 

Selloffs in the last eight years have bounced back with new higher highs the distance of the drop on top of the previous top.

 

The IWM Russell 2000 Exchange Traded Fund has under performed so far up 2% YTD. 

 

Opportunity exists to profit from fund rotation into the sagging sector.

 

 

Russell 2000 IWM stalled and was stuck trading between $134 and $138 since December. 

 

A pullback has brought the small caps to the $138 old resistance now support to lean on from a reward to risk standpoint.

 

    

Instead of buying long shares, a stock substitution strategy limits risk to the premium paid with unlimited upside profit potential. Less capital is required and the risk is less in dollar terms than buying shares outright.

Only close below the $130 level on the weekly basis would negate the multi year trend momentum in the Russell 2000 index.

 

 

The Options Way: Unlimited Upside Potential with Limited Risk.

An IWM long call option can provide the staying power in a potential larger trend extension.  More importantly, the maximum risk is the premium paid.

 

One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.

 

Choosing an option can sometimes be a daunting task with all of the choices and expiration months.  Simply put, traders want to buy a high probability option that has enough time to be right.

The option strike price is the level at which you have the right to buy without any obligation to do so.  In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss. 

 

 

There are two rules options traders need to follow to be successful.

Rule One:  Choose an option with 70%-plus probability.  The Delta is a measurement of how well the option reacts to movement in the underlying security.  

 

It is important to buy options that payoff from only a modest price move. 

 

There is no need to ONLY make money on the all but infrequent large price explosion.

Any trade has a fifty/fifty chance of success.  Buying options ITM options increase that probability.  That Delta also approximates the odds that the option will be In The Money at expiration.

 

Buying better options is more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.  
 
With IWM trading at $138.50, for example, an In The Money $130.00 strike option currently has $8.50 in real or intrinsic value.  The remainder of any premium is the time value of the option.

 

Rule Two: Buy more time until expiration than you may need.  Time is an investor’s greatest asset when you have completely limited the exposure risks. 

Traders often buy too little time for the trade to develop.  Nothing is more frustrating than being right but only after the option has expired premature to the market move.

 

Trade Setup: I recommend the July $130 Call at $10.00 or less.

 

A close below $130 on a weekly basis or the loss of half of the option premium would trigger an exit.

This option strike gives you the right to buy the shares at $130 per share with absolutely limited risk.  IWM has not been that low since November. 

The July option has two and a half months for BULLISH development.  An 82 Delta on this strike means the option will behave much like the IWM ETF.
 
The maximum loss is limited to the $1000 or less paid per option contract. A stop loss at half of the premium paid puts the exposure at about $500. 

 

The upside, on the other hand, is unlimited.

 

 

The IWM option trade break-even is $140.00 at expiration ($130 strike plus $10.0 option premium). That is $1.50 above IWM’s current price.

 

A 10% target YTD return in IWM would put the ETF at $148.  If that objective is reached the option investment would gain 80%+ to $18.

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