I believe that sometime, between now and October expiration (10/21), that the Russell 2000 (RUT) will drop to the 620-660 range. Do I have any technical analysis or inside information to support that? No! I don’t know which way this index will move, but that price certainly is within the wiggle range as of this week.
Note on the Risk Profile for RUT, below, that one standard deviation to the bear side is as low as 605 – so there is a certain level of probability that price could move there; as a matter of fact about a 20% probability.
So I decided to make a bet of $115 to open a OCT Put Butterfly on 9/14 (Wednesday). I decided us a spread to 20 points to give a wider base. It also increased the price a bit but gave me a better chance for a profit. You can see the details below.
(click to enlarge)
Note that I have put in price slices of +6% and -8%. Why these percentages? Because that seems to be a normal move to the upside or downside for many underlyings over a 30 day period and Bear moves are generally more violent that Bull moves.
Do I think or expect to make the max of $1,865 on this trade? No, but it sure would be nice. What I do expect is illustrated below:
(click to enlarge)
Let’s fast forward to the Friday before expiration (10/14). Note that I also increased the Implied Volatility by 3%, since if price does pull back, IV will probably increase. This actually eats into the profit picture a bit since it increases the premiums a small amount.
Note that anywhere between 580 and 690 the spread is profitable – even a small profit as high as 704. I will probably close at a profit of $100-200, if it ever comes. As always, only time will tell.
Donja just love this game?
