Given the shaky conditions in the market today I thought I would go for a relatively safe option and trade #IWM, which covers the Russell 2000 companies.
The fluctuations of these sorts of ETFs is nowhere near the level of individual stocks so the probability of experiencing outlier moves is significantly lower. However, it can still happen and we have to make sure that we don't over commit. If we look at, for example, the Covid shut down, the drop within 4 weeks was about 50%, which can wipe out inexperienced options traders.
I selected the May $175 / 115 strangle. Both legs are outside of the 1SD move so the POP (Probability of Profit) is over 76%. If this trade works out and we leave it till expiry (which almost never happens) then it would give us 91% annualised profit, which is much lower than most of my trades but, given the nature of this ETF, I am fine with the lower risk lower profit.
The stats
Trade Type: Short Strangle
Strike: $175 / 215
Expiry: 20 May
Delta: 0.6
IV Rank: 45.2
Premium: $2.16
Cap Req: $2232
Annualised Prof at Expiry: 91%
Let me know your thoughts.
I decided to close this today due to the volatility contraction and to free up some capital.
Closed at $1.84 for an annualised profit of 262%.
Is this deal something you will have to keep an eye on and possibly adjust or close the deal earlier than expiration ?