Small-Cap Crash Profit Opportunity?

Dear Reader,

On Friday, we looked at a Daily Price chart of the iShares 20+ Year Treasury Bond ETF noting that TLT had been making a new series of lower lows and lower highs.

For today’s Trade of the Day we will be looking at a Daily Price chart for the iShares Russell 2000 ETF, symbol: IWM.

Before breaking down IWM’s daily price chart let’s first review the investment objective of the ETF.

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities. The Fund seeks investment results that correspond to the performance of the Russell 2000 Index.

Now, let’s begin to break down the Daily Price chart for IWM. Below is a Daily Price Chart with the price line displayed by an OHLC bar.

Sell IWM Shares

The Daily Price chart above shows that the IWM ETF has been hitting new 52-Week Lows regularly since mid-October.

Simply put, an ETF does not just continually hit a series of new 52-Week Lows unless it is in a very strong bearish trend.

The Hughes Optioneering team looks for ETFs that are making a series of 52-Week Lows as this is a good indicator that the ETF is in a powerful downtrend.

You see, after an ETF makes a series of two or more 52-Week Lows, the ETF typically continues its price downtrend and bearish positions should be initiated.

Our initial price target for IWM is 155.00 per share.

129.5% Profit Potential for IWM Option

Now, since IWM is currently making a series of new 52-Week Lows this means the ETF’s bearish decline will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for an IWM put option purchase.

The Put Option Calculator will calculate the profit/loss potential for a put option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat IWM price to a 12.5% decrease.

The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following IWM option example, we used the 1% Rule to select the IWM option strike price but out of fairness to our paid option service subscribers we don’t list the strike price used in the profit/loss calculation.

Trade with Higher Accuracy

When you use the 1% Rule to select an IWM in-the-money option strike price, IWM shares only have to decrease 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money put option and the underlying ETF closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if IWM is flat at 162.47 at option expiration, it will only result in a 0.1% loss for the IWM option compared to a 100% loss for an at-the-money or out-of-the-money put option.

Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money put options. This higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options.

The goal of this example is to demonstrate the powerful profit potential available from trading options compared to ETFs.

The prices and returns represented below were calculated based on the current ETF and option pricing for IWM on 10/30/2023 before commissions.

When you purchase a put option, there is virtually no limit on the profit potential of the put if the underlying ETF continues to decline in price.

For this specific put option, the calculator analysis below reveals if IWM decreases 5.0% at option expiration to 154.35 (circled), the put option would make 64.7% before commission.

If IWM decreases 10.0% at option expiration to 146.22 (circled), the put option would make 129.5% before commission and would greatly outperform the ETF*.

The leverage provided by put options allows you to maximize potential returns on bearish ETFs.

The Hughes Optioneering Team is here to help you identify profit opportunities just like this one.

Interested in accessing the Optioneering Calculators? Join one of Chuck’s Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.

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Wishing You the Best in Investing Success,