Can IWM Catch Up to SPY and QQQ?
Can IWM Catch Up to SPY and QQQ?
By:Tom Preston
The underperforming option skew points to an upside
Spring is upon us, and that means blooming flowers, singing birds, and rallying markets. That’s been true for the big cap exchange-traded funds (ETFs), like SPY and QQQ, but not so much for the small-cap IWM.
After hitting its highest price in two years, IWM has spent the last week moving lower and underperforming the market. Fear of higher interest rates has weighed on IWM’s components, but that news might already be baked into IWM’s price, so it could be ready for a bounce.
IWM’s out-of-the-money (OTM) calls are trading over equidistant OTM puts, indicating the market sees risk to the upside. That might be enough for a trader to consider a bullish strategy in it.
IWM’s IV has ticked higher on the ETF’s weakness, and its 21% overall implied volatility (IV) and 53% IV rank make its options good candidates for short premium strategies.
If you think IWM might bounce in the next few weeks, or at least not fall too much farther, the short put vertical that’s long the 196 put and short the 198 put in the April weekly expiration with 38 DTE (days to expiration) is a bullish strategy that collects a credit 1/3 the width of its strikes, has a 76% probability of making 50% of its max potential profit before expiry and that generates $.23 of positive daily theta.
Tom Preston, tastylive chief market strategist, is responsible for the brokerage’s trading strategy, client-facing trading software and futures trading products. He contributes to Luckbox magazine and writes tastylive's Cherry Bomb newsletter. He's been trading options since 1992.
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