Thursday, March 19, 2015

IWM: Bear play, channel rules

Update 5/20/2015: IWM remained paused today, raising the possibility that wave 4 {-1} is a sideways correction that could go on for awhile. With 30 days to go before expiration, and with time decay working against me, I decided to mitigate my losses and close the position. Had upside momentum resumed, I would have waited.

Shares rose by 0.1% over 62 days, or a +0.6% annual rate. The options position produced a -4.4% loss on debit, for a -28% annual rate.

Update 5/19/2015: IWM has entered the last month before expiration and basically has no profit or loss to speak of. I can hang on a bit longer in the hope of salvaging something, but is it likely that the capital gains will overpower increasing time decay on the options?

A re-analysis of the chart suggests that I need not exit now, but I should be hair-trigger about ending the position at the least sign of a downturn.

A fresh Elliott wave analysis shows that wave 5 {-1} within wave 3 to the upside ended on April 14. Arguably, wave 4 ended on May 6 at the end of a three-wave declining pattern: A zig-zag, in Elliott parlance. The 2nd and 4th waves tend to alternate between zig-zag and flat patterns. Wave 2 was a flat, so I would expect wave 4 to be sharp and short.

However, it is certainly possible that what I've called wave 4 is in fave the end of wave A to the downside, with the internal five waves below the granularity of this chart in the case of a zig-zag. Alternatively, if wave 4 is a flat, then the internal structure would be three waves.

Impossible to say for sure, but I'm willing to take the risk, for a few more days, at least.

Wave 4 in my analysis completed a 50% Fibonacci retracement of the wave 3 rise from December 2014 to last April. In the case of a zig-zag, that level of retracement would suggest that the correction was complete. In the case of a flat, that level will be touched again.

Click on chart to enlarge.
IWM 180 days 4-hour bars

Note: An incorrect early draft of this analysis was posted by accident earlier. This is the corrected version.

The iShares Russell 2000 Index (IWM), an exchange-traded fund managed out of San Francisco, California, broke above its 20-day price channel on Wednesday and confirmed the bull signal on Thursday by continuing to trade above the channel boundary.
[IWM in Wikipedia]



The Russell 2000 index on which IWM is based differs from the S&P 500 and the Dow in that it tracks small-cap stocks. While the blue chips have faltered of late, failing to beak above their highest highs, the Russell 2000 has risen past resistance, giving its chart a bullish cast.

In terms of Elliott wave analysis, I count the current movement as the 3rd wave within a 5th wave within a 3rd wave to the upside. In other words, the uptrend is approaching its end but has a ways to go.

Click on chart to enlarge.
IWM 10 years weekly bars (left), 180 days 4-hour bars (right_

Implied volatility stands at 17%, in the 8t percentile of the most recent rise. This argues for a long options spread structure, such as a bull put vertical spread, expiring on June 19, 92 days hence. I have used that period in calculating the standard deviation ranges.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

Odds and Yields

IWM has completed one breakout to the upside since wave 3 {-1} began on Jan. 16. It yielded 1% over 29 days. It has broken out three times since wave 5 {+1} began on Oct. 15, 2014. All were profitable, on average yielding 2% over 24 days.

The Fund
IWM has a neutral ranking from Zacks Investment Research, the service I rely on for fundamental analysis.

The expense ratio is 0.2%.

The top five holdings in the portfolio are Qorvo Inc., Isis Pharmaceuticals, Brunswick Corp., Graphic Packaging Holding and Puma Biotechnology.

The earnings yield is 1.21% annualized at today's prices.

IWM goes ex-dividend in March for a quarterly payout of 44.5 cents per share.


IWM on average trades 28.8 million shares a day and supports an extremely wide selection of option strike prices spaced a dollar apart., with open interest running to four and five figures figures.

The front-month at-the-money bid/ask spread on !calls is 0.5%, compared to 0.8% on the most traded symbol on the U.S. markets, the exchange-traded fund SPY.

Options are trading briskly today, with calls running at 61% above their five-day average volume and puts at 38% above average.

The Trade

Bull call spread, short the $124 calls and long the $127 calls
bought for a debit and expiring June 20
Probability of expiring in-of-the-money


The risk/reward ratio stands at 1:1.

Decision for My Account

I've opened a bull position in IWM as described above.

-- Tim Bovee, Portland, Oregon,  March 19, 2015


My price channel trading rules can be read here. My long-term share trading rules can be read here.  My volatility trading rules can be read here. The channel rules are based on
 the classic Turtle Trading rules, which can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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