[Options] Back in the Box

Sean McLaughlin
December 1, 2021

I got all excited when Russell 2000 -- as measured by $IWM -- broke higher out of the 8-9 month range back in early November. To me, that felt like a big sign that stocks on the whole were about to go on a big bullish run into year-end.

Well, the sad trombone has been played and the breakout was short-lived. And as you can see from this chart, $IWM in recent weeks has completely retraced the breakout and has fallen right back into the middle of the previous range:

Man, what a letdown --- for the bulls.

But us options traders over here smell an opportunity!

The recent spike we've seen in $VIX (the fear guage) coupled with this price action in $IWM tells me that we may have a beautiful opportunity to sell some premium here, and that's exactly what we're going to do.

Here's the Play:

I'm selling an $IWM December 31 (weekly) Iron Condor. I'll be short the 210 puts and 235 calls, while protecting the position $5 away in both direction with long 205 puts and 240 calls. This entire spread can be put on for about a $1.70 credit. Here's how the trade structure appears:

The bet we're making here is that $IWM is likely to continue sticking in this range -- at least for a few more weeks. That failed breakout took all the starch out of the bulls who were feeling aggressive and the bears who were capitulating. I don't see either sides making any further aggressive moves before the end of the year and that's why I'm choosing these options that are expiring on December 31.

My goal is to book profits on this trade when I can close the entire thing down for 80 cents. This would be a capture of 50% of the maximum possible gain in the trade without having to hold the risk all the way into expiration on New Years Eve.

Of course, if we're wrong and either side rises up to take a stand, then I will close the entire spread down and book a likely loss if $IWM closes outside our short strikes -- so either above 235 or below 210. I'm not going to wrestle with it. We're wrong, time to move on.

If you have any questions on this trade, please send them here.

ASO subscribers can catch our next video Jam Session this Thursday at 2pm ET here. This is where we review some open positions and discuss any adjustments or exits over the past week.

And have you seen the new Options Made Easy course we just launched? I'm super proud of this and if you'd like to do a deep dive into how we think about options trading -- the All Star Charts way -- this is well worth your time.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7910

 

Filed Under