Update 1/12/2021: I exited my bear call options spread position on IWM 15 days before expiration, for a $4.93 debit per contract/share, a loss before fees of $3.85 per contract. Shares were trading at $210.49, up $28.90 from the entry level.
Referring to the chart below, showing IWM with three-hour bars, my decision to enter (blue vertical line to the left) was based on Elliott wave analysis that led me to conclude that a reversal to the downside had begun. What I had taken to be the end of a 5th wave of Subminuette degree turned out to be a subwave that by the time I exited (blue vertical line in the middle) had carried the price well above the zone of profitability. (The blue line to the right shows expiration.)
Shares rose by 28.9% over 43 days for a +340% annual rate. The options position produced a 78.1% loss for a -663% annual rate.
Lessons learned: The loss on this trade was compounded by my rule that requires an exit 21 days before expiration for profitable positions. This position was unprofitable at 21 days, and grew even more unprofitable in the last weeks of its life. A better rule would be to exit 21 days before expiration whether a position is profitable or not.
I have entered a short bear call spread on IWM, using options that trade for the last time 46 days hence, on January 15. The premium is a $1.08 credit per contract share and the stock at the time of entry was priced at $181.63.
The implied volatility rank (IVR) stands at 24.8, a bit on the low side.
|IWM-bear call spread||Strike||Odds||Delta|
The premium is 43.2% of the width of the position’s wing.
The profit zone covers a 5.1% move to the upside.
The risk/reward ratio is 3.6:1, with maximum risk of $392 and maximum reward of $108 per contract.
My entry decision was based on Elliott wave analysis showing IWM to be at the beginning of a downtrending move, wave 5 of Minute degree within wave 4 of Minor degree.
By Tim Bovee, Portland, Oregon, November 30, 2020
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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Based on a work at www.timbovee.com.