Friday, May 1, 2015

IWM Analysis

Update 5/8/2015: IWM drifted to the edge of profitability and I exited to avoid a loss in the week before expiration.

Shares rose 1.2% over seven days, or a +63% annual rate. The options position produced a +3.5% yield on debit, for a +182% annual rate.

The iShares Russell 2000 Index exchange-traded fund (IWM) broke below its 20-day price channel on Thursday. It remained below the boundary on Friday and yet pulled back sufficiently to be worth a look.

The symbol has completed four bear signals in the past year. Two were successful, producing an average profit of 1.3% each over 46 days. Two were unsuccessful, with an average loss of 3.4% over 18 days.

I shall use the regular MAY series of monthly options, which trades for the last time 14 days hence, on May 15

The goal of my trades is to construct direction-neutral positions 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.

[Russell 2000 in Wikipedia]



Click on chart to enlarge.
IWM at 11:05 a.m. New York time, 30 days hourly bars
Implied volatility stands at 84%, which is 1.4 times the VIX, a measure of volatility of the S&P 500 index. IWM’s volatility stands in the 84th percentile of its most recent rise.

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

Given the downtrending nature of the price, I've left $1.83 of the one standard deviation range beyond the profit zone.

Iron condor short the $123 calls and long the $125 calls,
short the $118.5 puts and long the $116.5 puts
sold for a credit and expiring May 16
Probability of expiring out-of-the-money


The risk/reward ratio stands at 1.2:1. The premium is $0.86 ($0.56 for the calls and $0.30 for the puts).

Decision for My Account

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

-- Tim Bovee, Portland, Oregon, May 1, 2015


My volatility trading rules 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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