Trade Alert – (IWM) May 22, 2012

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.

Trade Alert (IWM)

Expiration of the Russell 2000 iShares (IWM) May, 2012 $77 puts in the money at $1.98

Closing Trade

5-18-2012

expiration date: 5-18-2012

Portfolio weighting: 20% = 28 Contracts

We came within a hair’s breadth of walking away with the entire premium on our short position in the Russell 2000 iShares (IWM) May, 2012 $77 puts. The broad market weakness in the wake of the Facebook (FB) failure caused those fanciful dreams to go up in smoke. When you play at the deep end of the pool, this is the sort of thing that happens sometimes.

Still, I was so convinced that shorting the (IWM) would do well in coming days that I over hedged the short position through adding an extra 5% long in the (IWM) June $80 puts when we were still well out of the money on the $77’s. That one tactical move that I took three days earlier effectively covered the entire loss on the $May 77 puts, and then some.

The (IWM) tried valiantly to rally into the Friday close. But it might as well have been a salmon swimming up Niagara Falls during the mating season. It nosedived and finished at $74.69, creating a humiliating loss of ($77.00 – $74.69 + $0.33 = $1.98). The cash loss on the position is (100 X $1.98 X 28) = $5,544, or 5.54% for your notional $100,000 portfolio.

The lucky people who had (IWM) shares put to them in their Monday morning statements at of cost of $77were able to sell into the ferocious rally that ensued. They ended up recovering all of their losses and making a profit on this trade. This is how it often works out with options expirations. A spike down close on a Friday is followed by a gap up opening on Monday.

I am sure that we will be revisiting the short side on the (IWM) once again, probably in the near future. Greece, Facebook, the May selling, the American fiscal cliff, the rotten economic data, the end of Q1 earnings reports, a possible resumption of the US debt crisis, and the fact that the San Francisco Giants are unlikely to make it into the playoffs this year, could all combine to create a perfect storm. In fact, I’m kind of hoping we get a flash crash.