IWM UOA Longshot — Bullish Call Spreads with 35X Max Upside

Rebel Hub Education

by

Justin Nugent

June 29, 2023
at 7:12 PM

We’re back again, and this week we’re looking at IWM. Specifically, IWM call debit spreads at the $205/$210 strike, expiring August 4th (about a month and a week away).

These 8,000 contracts were bought against 4 open interest, and they cost this buyer about $0.14. That’s incredible, considering the maximum payout for these $205/$210 call spreads is $5.00 (more than 35X the initial cost) if the IWM rises at least 12.6% between now and then. Here are a few reasons why we think that might happen:

IWM Plays Catch-Up With QQQ and SPY

The IWM (Russell 2000 ETF) has lagged behind the SPY (S&P 500) and the QQQ (Nasdaq 100 ETF) significantly this year, but as quarterly rebalancing takes hold, it’s starting to show a lot of relative strength.

IWM YTD vs QQQ and SPY

IWM Weekly vs SPY and QQQ

We don’t think it’s too late to join in on this catch-up trade. Quarterly rebalancing is still a real presence as fund managers shift positions to see what hasn’t been performing, and there’s plenty of fund manager money on the sidelines to boost small cap stocks — many of which are growth names and have a long way to go before they return to their ATH. Here are a few more reasons we love this trade:

Low IV in the IWM Means Cheap Options

Historically, IWM options are running cheap. Only 1% of the time in the past year has the IV in the IWM ETF been lower.

Data sourced from MarketChameleon.com

That means most of the time, this play would have been far more expensive. There’s another big reason we love this trade.

Potential Payout and Time to Expiration

Closely related to the above reason, these options have plenty of time for things to go right, and if they do, there is a huge payout.

As always, cheaper option trades do not have to mean “spamming more of the same contract” — discipline and position sizing still apply. These are cheap because the market thinks it won’t happen. That said, IWM options have been cheap all week, and that hasn’t stopped the ETF from outperforming the expectations of the options market.

While we often use the double or half rule to manage our trades (cut losses at half loss, take profit at 100%), I can tell you that I will be holding these for the long hall. If it works, that’s okay. If it doesn’t, that’s okay too. These types of “longshots” are sometimes worth the wait.

Good luck, and happy trading!

PS: Find out more of what we’re seeing in the world of unusual options activity — in tickers across the market, from the VIX, to AAPL, to little-known stocks, with our Unusual Options Activity service. Try a month of trades below.

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