Medium term
Trade view / 10 June 2016 at 15:26 GMT

#SaxoStrats: A Russel 2000 ETFJuly16 116/114 Put Spread

Head of Futures & Listed Options / Saxo Bank

IWM – the ETF on the Russel 2000 – is now overbought. Stochastics and RSI are giving us a selling signal. so we're buying the July16 116/114 Put Spread.

IWM Daily Bar Chart
Source Saxo Bank 

Management and risk description

For a $20,000 trading account I would invest no more than 1% of the account value or $200.

Entry: Buy IWM July16 116/114 Put Spread at $0.79
=> Buy IWM July16 116 Put at $2.74
& Sell IWM July16 114 Put at $1.95

Max Profit at expiry is limited

Maximum profit at expiry achieved when underlying price =<short price
At expiry maximum profit   = long Strike price minus short strike price minus premium paid
= 116 - 114 -0.79
= 1.21

One put spread worth $0.79 X 100 ETF = $79
I can invest no more than $200 (1% of the account value)
$200/79$  = 2.53 Spread. I will therefore by 2 IWM July16 116/114 Put Spread.

For 2 IWM July16 116/114 Put Spread I spend $158 ($0.79 X 100 ETF X 2 Spreads) to realise a profit of $242 ($1.21 X 100 ETF X 2 Spreads) if the market closes at or below 114 at expiry.

Return on investment if the market closes at or below 114 at expiry

= profit/premium X 100
= $1.21/$0.79 X 100
= 153.16%

Maximum loss

Maximum loss is limited to premium paid
Maximum loss is $0.79 or $158 for 2 Put Spreads.

Break even point at expiry

Long strike - premium paid
$116 - $0.79 = $115.21

Target: 114 or below

Time horizon: 35 days

5 year chart
IWM 5 years chart
 Source: SaxoTraderGO

— Edited by Clare MacCarthy

Non-independent investment research disclaimer applies. Read more
10 June
AlexBr AlexBr
Just made it for 0.76 (2.61 - 1.85). Thanks for the insight!
10 June
Patrice Henault Patrice Henault
Well done!
10 June
Feders Feders
Hi Pat, the bat!, as Georgio named you ;-), the decision to invest only 1% and not 2% as has been recomended in WOW, is because you are not that confident with this trade?
10 June
Patrice Henault Patrice Henault
Hi Feders,
In this trade I assume that I open an account with $20,000, so for the first trade I invest 1%. If the trade as expected is a winner I will invest 2% on the next trade but never above 2% of the account value on any given trade.
16 June
Gus1 Gus1
Hi Patrice At the time we entered this trade, the target for IWM is 114 or below that will result in Net Gain of 121 per option. At the current time, IWM is at 113.4 and the trade is showing only 2.18 gain per option. What I am missing here, please explain.
16 June
Patrice Henault Patrice Henault
Hi Gus1 the net profit is the profit at expiration. Now there is still some time value on both options. So even if IWM is trading below 114 you won't reach max profit until expiry. If themarket stay below 114 you will see your P&L increase day after day.
16 June
Gus1 Gus1


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