Russell 2000 Index Monthly Income Trade

Gregory A. Clay • by Gregory Clay

Option Trading Strategist & Financial Writer • Dec 14, 2016 at 1:18 PM EST

Prices are due for a pause and we are betting the IWM ETF won’t be above our target price at January option expiration.

We have set up a Russell 2000 Index ETF (NYSE:IWM) short-term (37-day) option strategy (based on Tuesday’s closing quoted bid/ask mean)

Investors could simultaneously:

The difference between funds received and paid out is a $.60 per share credit which we keep if the Russell 2000 ETF closes below $142 on Friday. January 20^th but immediately exit the position if it appears the price will end up higher. If the price gaps higher open the trade using higher strike prices.

The Russell 2000 Index ETF (NYSE:IWM) is an exchange traded fund (ETF) that seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Russell 2000 Index, which measures the performance of the small-capitalization sector of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index.

Why we recommend it:

As evidenced in the daily chart below, all the major equity indexes achieved new highs during the current so called “Trump” rally. We are making a technical play on the Russell 2000 Index ETF (NYSE: IWM). Most of the major equity indexes are overbought and upward price movement needs to stabilize to absorb this overbought condition, plus bullish momentum is dissipating.

Taking a look at the weekly chart below to perform further analysis shows the Russell 2000 Index ETF (IWM) is bouncing up against a resistance level. Also, note that the circles below highlight overbought levels where the price has always pulled back the past few years. Prices are due for a pause and we are betting the IWM ETF won’t be above our target price at January option expiration and presents an opportunity to profit from setting up a Russell 2000 Index ETF (IWM) bear call credit spread.

52-Week High: $138.92

52-Week Low: $93.64

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