IWM Analysis

Update 12/9/2016: I exited IWM after it continued its upside move. I’m not certain what Dough trader Ryan was thinking, but I presume he was looking for a downturn and a further drop in implied volatility. Didn’t happen. Could happen soon. Or not.

The beauty of the iron fly options strategy, which I’m new to, is that the risk/reward ratio is far better than with the textbook iron condors. Unlike many other short option plays, the iron fly loses more slowly than it gains.

Shares rose by 3.3% over three days, or a +397% annual rate. The options position produced a -13% loss on debit for a =1,552% annual rate.


iShares Russell 2000 (IWM)

This trading idea came from Dough trader Ryan.

I shall use the JAN06 series of options, which trades for the last time 31 days hence, on Jan. 6.

Implied volatility stands at 18%, which stands in the 16th percentile of its annual range. The price used for analysis was $221.22.

Ryan’s trade differs from my normal practice in that implied volatility is low in relation to its annual range, and similarly low in relation to its most recent move. Here’s his structure.

Iron condor, short the $132.50 calls and long the $137.50 calls,
short the $132.50 puts and long the $125.5 puts,
sold for a credit and expiring Jan. 7.
Probability of expiring out-of-the-money

JAN07 Strike OTM Δ
Upper 132.50 39.6% 62
Lower 132.50 58.3% 40

The premium is $3.83, which is 77% of the width of the position’s wings.

The risk/reward ratio is 0.8:1.

Decision for My Account

I have entered a position on IWM as described above. The shares at the time of entry were priced at $134.13.

Tim Bovee, Portland, Oregon, Dec. 6, 2016

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