Some trading sessions are normal. They lie in the meat of a distribution curve, hugging the mean. Monday was not one of those days. Rather, it was an outlier and a positive one at that. While the S&P 500 and Nasdaq slept the day away, Sir Russell, the mighty steward of some two-thousand small caps across the land, awoke.
Twas an awakening nine months in the making. And it didn’t disappoint. By day’s end, the Russell 2000 Index ETF closed up by 2.59% on the highest volume in a month. To punctuate the rally, IWM surged into the close, ending at the session high. Nothing like spiking the football to make sure all onlookers realize you made it to the end zone.
Naysayers may well point to the fact that the peak of IWM’s range still lies above, untouched, at $234.53. To which I’d reply – “I care not!” Monday’s session was so bullish that I’m declaring this the breakout we’ve all been waiting for. If you’d like to sit idle until we eclipse the peak (which could be tomorrow), then feel free. I consider it an inevitability after Monday’s surge.
Below I’ll discuss various ways to play the breakout. I remind you that none of this constitutes investment advice. Consider it an exercise in learning proper ways to capitalize and adapt positions to a breakout.
Existing Positions
Let’s look at ideas for managing covered calls, naked puts, and iron condors.
Covered Calls
The obvious choice here is to either uncover the stock position or at least roll up the call to a higher strike to open up the profit potential. A covered call is a +1 strategy. When IWM breaks out, it quickly becomes a +2 to +3 stock. If you believe that the breakout has legs, then sitting in a traditional 40-delta short call certainly won’t fully capitalize on the opportunity.
Naked Puts
If you’ve been carrying naked puts (or bull puts for that matter) on IWM, then after Monday’s burst, you’ve probably made a good chunk of the max profit. To re-up the profit potential, consider rolling up the put to a higher strike price and/or longer-dated month. For instance, we’ve been tracking a short Nov $205 put in the Team Phoenix trading lab. It dropped in value to 20 cents, so we rolled to a Dec naked put today to replenish the available cash flow.
Iron Condors
Condor traders have had their fun in the sun for months on end with IWM and RUT. But all good things must come to an end. There’s a chance the November and December position for Cash Flow Condors is about to get tested. To those harnessing such positions, remember your training. When major resistance gives way you have a few choices.
A) sit tight and hope this breakout doesn’t travel too far and reach your bear call
B) exit the bear call spread side early.
C) roll up the bull put or add extra bull puts to hedge
D) hedge the portfolio by adding other bullish positions on RUT/IWM or anything else correlated to the Index.
New Positions
As for new positions, well, there’s no need to overthink things. Anything bullish will suffice. It just comes down to how aggressive you want to go. If you think we really blast off, then a more offensive strategy like long calls or bull call spreads is the way to go. Higher probability cash flow lovers might consider naked puts or bull puts. You could also buy shares outright with the intent of adding short calls when the short-term momentum wanes.
No one knows the ultimate outcome of this breakout attempt, but given the bullish market backdrop, strong seasonal winds, and the adage “the longer the base, the higher in space,” I have to be optimistic here.
One final note. Did you notice which areas led the market on Monday? Reopening industries like casinos, airlines, and retail. The so-called underbelly was also percolating. Such themes are just what the doctor ordered for Sir Russell. More, please.
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