There are questions aplenty from investors about small-cap stocks and ETFs and whether they can continue their momentum beyond 2024 and carry out an extended, multi-year bullish run.
In December 2023, I wrote here on Barchart.com that small-cap stocks looked ready to take off in 2024. The Russell 2000 is up more than 12% year-to-date, but almost almost all of it has come in the past month. It’s got a nearly eight-fold advantage on the S&P 500.
As part of my December article arguing for a small-cap resurgence, I suggested a particular unusually active call option for the iShares Russell 2000 ETF that was a reasonable bet on this happening with only a tiny upfront investment.
“The April 19/2024 $250 call stands out. It had a volume of 3,765 yesterday, 5.77x its open interest. The ask price was a low $0.42 with a 0.04375 delta. You’re looking at a down payment of just 0.16%. Of course, there’s a reason for that: it’s unlikely to increase by 25% over the next 119 days, I wrote on Dec. 22.
“However, it only has to rise by 5% over the next four months for you to double your money by selling the option before expiry.”
It hit a high of $211.88 on March 28, providing the 5% bump needed to double your money selling the call before expiration. You would have made a whopping $16 per contract.
Since its April 19 low of $191.34, it’s gained about 16% as I write this early in Thursday trading. It’s on a roll.
In yesterday’s trading, IWM had 54 unusually active options, 32 calls, and 22 puts. Five of those 54 had a Vol/OI (Volume to Open Interest) of 10.0 or higher.
Here’s what I think is the best of the bunch.
The Outlier Put Option Looks Intriguing
As you can see from above, all of the unusually active call options are expiring within a week. It is the lone put that stands out with 50 days to expiration. It has me intrigued for several reasons.
As of Wednesday's closing price of $223.86, the Sept. 20 $216 put was out of the money. The $3.85 bid price is a healthy annualized return of 12.4%. This IWM put had a Vol/OI ratio of 24.72, with volume of 104,731. That’s about 5% of its 30-day average volume.
The tough part of making this bet for income generation—and let me be clear, I am not a technical analyst of any sort—is that the six-month chart appears to be what is typically referred to as a head-and-shoulders chart pattern.
If that’s true, there could be a reversal to the $200 level over the next 50 days. Selling puts means you would have to buy the shares at $216 at expiration even though they’d be trading for around $16 less, a paper loss of $1,600 less $385 premium.
That’s the tricky part of selling puts, your losses are unlimited.
Let’s hold off on the put for now and move on to the four calls.
A 5% Bump Needed
As I examine the four calls, my first thought is to focus on the lowest strike price, given that the calls will expire in a week at best.
That would be the Aug. 7 $223 strike with a $4.10 ask price and a down payment of 1.8%, which is reasonable. The most you can lose is $410 to reserve the right to buy $22,300 in IWM stock.
The delta is 0.55351. You can double your money selling the call before it expires in six days if IWM’s share price appreciates by $7.41 (3.3%). Forgetting the possible reversible for a moment, that move is very doable.
So, the $223 strike has a reasonable risk/reward proposition.
The $230 call expires in four days. Based on the 0.20797 delta, it must appreciate by $4.09 (1.8%) before it expires on Aug. 5 for you to double your money. As I write this, IWM is down 2.9% or $6.64.
The ask price, as I write this, is $0.14, down from $0.85. Based on the delta of 0.04898, it has to appreciate $2.86 (1.3%) to double your money by selling before it expires at the close of Monday’s trading.
If you’re looking to hold IWM beyond Monday, it will have to appreciate by nearly 6% in two days, essentially, because today’s trading is off significantly due to negative economic news -- weekly jobless claims rose to near a one-year high, and July’s manufacturing activity contracted, the most in eight months -- suggesting that using these calls to buy shares in IWM just got a lot less realistic.
The Bottom Line on IWM
All five unusually active options have their pros and cons.
However, if you want to own IWM for the mid-to-long term, the Sept. 20 put looks like something an aggressive investor might be interested in.
As I write this, the bid price is $6.70. Based on the $216.68 trading price, it is just out of the money. Should it reverse and remain above $216 for the next 50 days, your annualized return would be nearly 23%, while your net price should you have to buy the shares is $209.30.
If you’re bullish on small-cap stocks—and today’s news probably shook that confidence—it’s the bet with the highest risk/reward proposition.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
