The Russell 2000 is at a critical technical support area this morning. IWM is trading near its 50, 100, and 200 day ma’s, which are all in the $114-$114.75 area:
A break below here would be significant, likely leading to a test of the $110-$112 support area. If IWM can get back above $115.50 this week, then today’s selling will simply be another false alarm.
We currently own a time sensitive put butterfly in IWM, since it expires on Friday. Here was the trade from August 21st:
TRADE – Bought to open the IWM ($115.00) Sept 117/110/103 Put fly for 1.85
– Bought 1 Sept 117 put for 3.04
– Sold 2 Sept 110 puts at .67 (1.34 total)
– Bought 1 Sept 103 put for .15
With IWM now trading around $114.25, the put butterfly is worth about $2.70, vs. the current intrinsic value of about $2.80. Since IWM is far away from both the long 117 put strike and the short 110 put strike, the put butterfly is likely to trade like a simple short IWM position between now and Friday expiration.
Since IWM is trading at a multi-week low and on the verge of breaking the $114-$114.50 support area, we are going to hold out for larger profits in the put butterfly for now (the max value is $7). However, if it gets near $115 or moves above that level, we are likely to exit the position for a small gain or a wash.