IWM Draws Big Put Action

Oct. 6.09 | About: iShares Russell (IWM)

By David Russell

IWM Chart

Puts on the Russell 2000 are often used to hedge entire portfolios, and today's option activity suggests that one trader is concerned about the small-cap index dropping as much as 25 percent.

The iShares Trust Russell 2000 Index Fund (NYSEARCA:IWM) is up 2.13 percent on the day, trading at $60.33. The trader bought 40,000 of the ETF's March 60 puts for $5.30 and helped subsidize the cost by selling the same number of the March 45 puts for $1.10.

The net debit on the trade is the $4.20 spread, which is also the strategy's maximum risk. The maximum profit will come with IWM at or below $45 and could produce a return of more than 200 percent if held through expiration.

While this could be a protective position, shares would have to rise above $64.20 to overcome this cost of insurance. On the downside, the price would have to drop to levels last seen in April to get a full payoff.



(Chart courtesy of tradeMONSTER)