Follow Up to Trade Alert – (IWM) May 1, 2013

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.

Further Explanation to: Trade Alert - (IWM)

Buy the Russell 2000 iShares ETF (IWM) May, 2013 $96-$99 in-the-money bear put spread at $2.80 or best

Opening Trade


expiration date: May 17, 2013

Portfolio weighting: 10%

Number of Contracts – 36 contracts

In view of the dismal ADP private jobs number today of 119,000, I am going to take on a short position in the Russell 2000 iShares ETF (IWM). We are in May, as in the “Sell In” variety, and the markets are the most over extended in history.

On top of that, The (IWM) has been acting particularly poorly of late, failing to break to all time highs when the other indexes did so, setting up what could be the beginnings of a downward sloping wedge on the charts.

Small cap stocks are usually the leading indicator of a bear market. This is because they are poorly capitalized, bad credits, have less access to financing, and are more vulnerable to economic downturns. When the (SPY) falls, the (IWM usually declines by 1.5-2.0 times as much.

I am being very cautious here, only going out 13 trading days to the May 17 expiration. To lose money on this, we need a major upside breakout on the stock indexes, especially the (IWM). Given the soggy background outlined above, I am willing to bet against that.

The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don’t execute the legs individually or you will end up losing much of your profit.
Keep in mind that these are ballpark prices only. Spread pricing can be very volatile on expiration months farther out.

Here are the specific trades you need to execute this position:

Buy 36 May, 2013 (IWM) $99 puts at……………$6.30
Sell short 36 May, 2013 (IWM) $96 puts at..…….$3.50
Net Cost:………………………………………….....$2.80

Profit at expiration: $3.00 - $2.80 = $0.20

(36 X 100 X $0.20) = $720 or 0.72% profit for the notional $100,000 portfolio.

IWM 5-1-13