We are unsure of how the actual announcement of the Fed’s second round of quantitative easing, aptly dubbed “QE2,” will impact the market. It’s stating to look like a case of “buy the rumor, sell the news.” And while there is an increased risk for a sudden downside move, the Fed does have the ability to beat the expectations that have been set, and we could see a sudden rise in market volatility.

With all of the uncertainty out there and the expected rise volatility, we don’t want to try to guess which direction the market will go. Instead, we think it’s best to position ourselves to profit whether the market rallies or declines with an options straddle on the iShares Russell 2000 Index Fund (NYSE: IWM).

Trade: IWM December 70 Straddle

Buy to open IWM Dec 70 Calls
Buy to open IWM Dec 70 Puts

Target Entry Price: We are looking to enter the trade at $632 per spread.

Profit: Traders profit from an increase in volatility with this straddle.

Max Loss: $632 per spread
Max Gain: Unlimited
Breakeven at Expiration: $76.25 or $63.61

Position Sizing: With this purchase we’re paying a premium up front. Our maximum loss is the amount that we’re paying for the spread. Your personal position sizing is dependent upon the size of your portfolio and the risk you’re comfortable taking on.

To learn more about this trade, watch the video here.

Disclaimer: It is important to understand the risks of trading options before you attempt a trade like this. This article is for educational purposes only.

This article is brought to you by LearningMarkets.com.