Markets have surged to historic levels, fueled by the so-called Trump trade. Such significant moves often set new support and resistance levels in major indices. The iShares Russell 2000 ETF (IWM) is particularly interesting for swing traders, as it tends to trade within predictable ranges over extended periods. We’ll review how to trade it from here with options. The small-cap benchmark is up 8% in the past one month on enthusiasm for Trump’s possible tax cuts. In the 5-year weekly chart below, previous trading ranges for IWM are highlighted. Typically, once IWM breaks out of or below a range, it establishes a new one, trading within it for several months. Following the elections, IWM has broken out of its previous range and is now establishing a new one between $242 and $225. Given that IWM is trading at the top of the new trading range, I’m considering a bearish trade on IWM. Instead of betting on where IWM will go, I’ll use a trade structure called a bear call spread to bet on where it likely won’t go. With $242 as the upper bound of the range, I’ll sell a $245 call option, just above the current resistance level. The trade As mentioned earlier, the trade structure I am using here is called a “bear call spread,” also known as a “call credit spread”. To construct my trade, I need to sell a $245 call option and buy a $250 call option as a single unit. Here is my exact trade setup: Sell $245 call, Dec. 13 expiry Sell $250 put, Dec. 13 expiry Premium/Credit: $130 Risk: $370 This is a high-probability trade, with the options market indicating a 65% chance of success. By leveraging support and resistance levels, I’m adding an additional edge to this setup. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
