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Trade Alert: March 3

ByKirk Du Plessis
Published 03/03/2013, 08:53 AM
Updated 07/09/2023, 06:31 AM

Today we are opening the new position as follows:

Trade: Sell IWM 94 April CALL & Buy IWM 95 April CALL

Premium: $25 (0.25) Net Credit or better per contract

Underlying Price: $90.89

Max Return: 33%

Break-Even Price: $94.25

Time Until Expiration: 47 Days

Probability of Loss: 23.19%

Trade Explanation: Short of the quick move down we had 2 weeks ago it seems we are trying to test the highs once again. Yet trading into the close last week was less than convincing for the bulls. All this adds up to a new trade.

With volatility still heart-breakingly low the only choice we have on credit spreads is to move closer into the market, collect more premium and give ourselves enough time to take profits early.

As with the TLT and DIA trades we have also put on this year the goal for this spread is not to hold until expiration if we can exit early with a profit (say around .10-.15). Trading the expiration month out to April gives us some wiggle room to let the market work through this fresh round of highs.

IWM
The charts do show weakness but this is a straight odds trade – high premium with much smaller risk profile than a typical spread in the SPX, RUT, etc. Our short strike has a 23% chance of closing in the money so we are effectively trading with 77% chance of success.

For this trade we are only risking roughly $75 in margin requirement per contract to possibly make $25 in premium collected on this trade by expiration – making an solid gain of 33% overall if held all the way. As always, if you are having trouble getting filled, try legging into the spread (i.e. buy the higher call first and sell the lower call in separate orders).

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