Considering Our Options – $IWM on the Brink?

by Enis September 15, 2014 11:02 am • Commentary

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:

IWM daily chart, 50 day ma in pink, 100 day ma in green, 200 day ma in yellow, courtesy of Bloomberg
IWM daily chart, 50 day ma in pink, 100 day ma in green, 200 day ma in yellow, courtesy of Bloomberg

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.