Thursday, March 19, 2015

Paper Trade: IWM

Update 3/28/2015: The paper position expired out of the money for maximum profit on March 28.

IWM's stock declined by -1.4% over the nine-day lifespan of the position, or a -57% annual rate. The paper options produced a 100% yield on debity, for a 4,057% annual rate.

I've been working through a series of paper trades exploring how well  my volatility strategy works with stocks and funds that don't have earnings or any other event occurring at the trade, and that don't have relatively high implied volatility.

See my post, "Testing: Expanding the volatility strategy", for details.

For today's paper trade, I'll use the exchange-traded fund IWM, which tracks the Russell 2000. I placed a real trade under my price channel rules earlier in the day. The analysis can be read here.

The real trade was a long bull call spread, bought with a debit and expiring in June.

For the paper trade, I'll use my volatility strategy, which uses short vertical spreads, sold for a credit and expiring in less than two weeks.


The goal of my trade is to construct a direction-neutral position on paper with a zone of profitability at expiration covering all of the one standard deviation range implied by volatility and options pricing, or the 30-day hourly chart support and resistance range, whichever is wider.


Implied volatility stands at 16%, below the starting point of the most recent rise. I'll be trading options from the MAR4 series of Weeklys, which trade for the last time on March 27, eight days hence.

For the chart range I've used the March 10 low and the March 18 high as the boundaries.

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

The Trade

I'll structure the position as a bullish short vertical spread, relying on the directionality of the trading signal as my guide. The position places all above $123.68 in the zone of profitability, on paper, providing a cushion of 0.9%.

Bull put spread, short the $124 puts and long the $123 puts,
sold for a credit and expiring March 28
Probability of expiring out-of-the-money



The risk/reward ratio stands at 2:1. The premium received is 32 cents with the stock price at $124.79.

Decision for My Account

This is a paper trade and so no money is involved.

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


My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

The directional score is calculated as the sum of the following:
  • Zacks rating --The Zacks ratings are translated as follows: 1=2, 2=1, 3=0, 4=-1 and 5=-2.
  • Enthusiasm rating --: A single percentage derived from the number of analysts whose opinions are in one of five categories: Strong buy, buy, hold, sell and strong sell.
  • Strong buy share -- The percentage of all analysts who rank the stock strong buy. If the share is 60% or greater, the score is 1; if 40% or less, then the score is -1; otherwise, the score is zero.
  • Ethusiasm momentum -- The score is 1 if today’s enthusiasm rating is larger than the rating 30 days earlier; otherwise, the score is zero.
  • 30-day direction -- The trend that best describes the 30-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.
  • One-day direction -- The trend that best describes the one-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.


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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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