[Options] It's Now or Never, Smalls
One can easily identify the the level $IWM is keying off of. It's resting on support that was the prior cycle pre-Covid highs.
To say this price level has "memory" would be an understatement.
The headline risk and blowups in regional banks has weighed heavily on the $IWM index relative to its big brother peers, and it has kept a healthy bid in put options. We're going to use this to our advantage to participate in a "catch-up" rally for the small caps.
Here's the Play:
I like entering an $IWM October bullish 155/190 Risk Reversal for a small net credit. This means I'll be naked short the 155 puts and long an equal amount of 190 calls. I'm using the proceeds for the put sale to pay for the purchase price of the long calls. Ideally, the trade is put on with a small net credit left over. The size of the credit is not important, as its not what we're playing for, but its nice to have something left over if both options expire worthless.
On the defensive side of this play, we need to be aggressive due to the naked short puts. We don't want to let them get away from us. So any $IWM close below $170 per share is our signal that we're early or wrong. Either way, we'll close the entire position down for a likely small loss. We don't hope and pray that the market will reverse in our direction when holding naked short puts. We just get out.
In the meantime, I'll be keeping an eye of the value of my open options. If $IWM starts trending in our direction, I'll look for any opportunity to close all of my short puts when they are trading at less than half of the value of the long calls. To exit the puts, I will sell half of my calls and use those proceeds to close ALL of my puts. This trade will be done for a small net credit.
If I successfully pull this off, then I'll be holding half of my long calls free and clear. In fact, I'll have a built-in profit (the credits I received both at trade initiation and when I closed the puts). At this point, I'll have literally nothing to lose (except open profits) and the possibility of unlimited gain.
Sweet.
On the other hand, if $IWM sits here and does relatively nothing -- not triggering our stop, but not rallying either -- then both our short puts and long calls will expire worthless in October and we keep to keep the measly little credit we collected today at trade initiation. Not a bad outcome for a trade that didn't go anywhere.
If you have any questions on this trade, please send them here.
ASO subscribers who missed last week’s video Jam Session where we reviewed activity in our options portfolio from the past week can catch it here.
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: 323-421-7991.