The iShares Russell 2000 (IWM) ETF put in a stellar performance on Monday, rising 6.1% on the back of Fed Chairman Jerome Powell’s comments. Is there a way to make money in options trading with this popular exchange traded fund?
We’ve seen that the Fed is willing to support the market by any and all means. You can call it the “Powell Put.”
As an option trader, I want to be following the money flow and it looks like a lot of money is flowing into small caps as they play catch-up with the other indexes.
One bullish trade I’ll be looking at today is a bull put spread on IWM. A bull put spread is a defined risk strategy, so you always know the worst-case scenario in advance. This type of trade will profit if IWM trades sideways or higher and even sometimes if it trades slightly lower.
The 50-day moving average is around 120 so I would look at placing the spread around that level. IBD daily charts draw the 50-day line in red.
What Is A Bull Put Spread?
A bull put spread using the put option expiring June 19 and the 120-115 strike prices would generate around $90 in premium with a total risk of $410.
That means anyone selling that bull put spread has the chance to achieve a 21.95% return in around 32 calendar days if IWM stays above 120.
Given the ETF looks bullish at its current trading level of 132, I like those odds.
The breakeven price on that trade is 119.10, which is calculated by taking the short put strike of 120 less the 90 cents in premium received for one put option contract. (Multiple 90 cents by 100 shares to get $90 in total premium.) The maximum loss of $410 would occur if IWM closes below 115 at expiry.
For a trade like this, I would set a stop loss at two times the premium received, or $180. If that stop loss is not hit, I would hold to expiry and let the spread expire worthless.
Options Trading: Watch This Technical Level
I’ll also be keeping an eye on the rising 20-day moving average, which is currently around 126.
One thing I like to do sometimes is enter my order for slightly higher than the spread is currently trading, so instead of selling the spread for 90 cents, I would put in the order to sell for $1.10.
Sometimes, if the market has a small intraday pullback, I’ll be able to get filled at the better price. If not, the order remains unfilled and I move on to the next opportunity.
Doing this gives me the best chance of getting a great price for selling the spread.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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