As we get closer to the beginning of 2020, I’ve been eyeing another bullish position on the iShares Russell 2000 ETF (NYSEARCA:IWM).
Both the large-cap and small-cap indexes have continued pushing higher this week — a sharp contrast to 2018’s holiday season where the market was turning higher after a massive drop.
It looks like the bullishness will continue, though there may be a pullback here and there, and so, I would like to recommend collecting a little extra income from a put write before the year is over.
A Historically Bullish Time for Small-Caps
As I mentioned in my previous IWM recommendation, the first two weeks of a new year tend to be bullish for small-cap stocks.
All the fundamental market factors supporting small-cap stocks are still in place as well.
Short-term interest rates are still low, and long-term rates are rising. Regular Trade of the Day readers know that this kind of environment benefits banks because it raises their profits from net interest margin.
Why is that important for the Russell 2000 then?
Because the financial sector is the most represented sector in the index. That means that if banks — particularly small banks — are doing well, the Russell 2000 is likely going to do well.
Daily Chart of the Russell 2000 Index — Chart Source: TradingView
The Russell 2000 has pushed well beyond its old resistance at the 1,600 level, and the next big challenge is overcoming resistance at around 1,710.
We may see a pullback before then because the index is starting to lose a little momentum, but even a slight pullback before pushing higher wouldn’t hurt the IWM position I am recommending.
A Far Out-of-the-Money Put Write
IWM’s push higher has increased the premium of put writes because investors believe a pullback is possible. As a result, we can sell a put write that is far out of the money and still collect a decent premium.
Daily Chart of iShares Russell 2000 ETF (IWM) — Chart Source: TradingView
If you look at the chart above, you can see that IWM overcame resistance in the $158-$160 range, and I believe the stock will find support in that range going forward.
The last trade I recommended on IWM was a call debit spread, which was meant to take advantage of its continued rise. Now, I want to take advantage of its strong potential support. By selling an option with a strike price well below IWM’s old resistance levels, traders can lower the risk they take on with this put write.
Sell to open the IWM Jan. 17th (2020) $154 put at about $0.29.
Note: Be sure you are opening the monthly IWM options that expire on Friday, Jan. 17, 2020.
This is a high-risk trade, so take a small position.
About Naked Put Writes
A naked put write is a bullish position in which you expect the price of the underlying stock to increase.
InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.
