New Trade Alert for (IWM)
Russell 2000 Exchange Traded Fund
Buy January IWM $107.00 Call @$10.50 or less
Risk Rating: 4 (1 = lowest 5 = highest)
Above Break Even Probability: 50%
Probability of maximum loss: 13%
Place Stop Loss at half of premium paid.
Small Caps with BIG PROFIT POTENTIAL
Once leaders on the market rally, small cap stocks have lagged behind and remain negative for 2015. Major markets have seen a rally run with Tech up 25% in the last two months closing in on new ALL TIME HIGHS.
The broad market barometer S&P 500 has rebounded to turn positive YTD and stands within striking distance of the tip top. A double digit bounce from the August bottom is another example of the snap back attack that has frustrated shorts for six years plus.
The IWM Russell 2000 Exchange Traded Fund remains stuck at the $116 level and a loser of 3 ½ percent so far in 2015.
A push above the $118 midpoint of the past 52 weeks targets a full recovery to $129.
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 $110 midpoint support lows level on the weekly basis would negate the bottom base 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 expirations. 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 $115.75, for example, an In The Money $107.00 strike option currently has $8.75 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 January $107 Call at $10.25 or less. A close below $110 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 $107 per share with absolutely limited risk. $106.99 is the 52 week low in IWM.
The January option has two and a half months for BULLISH development. An 80 Delta on this strike means the option will behave much like the stock.
The maximum loss is limited to the $1025 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 $117.25 at expiration ($107 strike plus $10.25 option premium). That is $1.50 above IWM’s current price.
A solid push above the $118 halfway mark of the 52 week high to low sell off targets a full retracement back to $129. A rally back to the high would see the option investment would gain 100%+ to $22.