IWM Long Strangle Benefits from Large Stock Price Moves

Russell 2000 ETF (IWM) is currently showing below average volatility with an IV Percentile of 13% and an IV Rank of 16.49%.

Today, we’re going to look at a long strangle trade due to the low IV percentile, that will profit if IWM makes a big move in either direction in the next few weeks.

A long strangle profits in two ways: from a rise in implied volatility, or from the stock moving outside the expected range by expiration.

Low implied volatility works in the buyer's favour at entry. It means the options are relatively cheap and the market is pricing in a narrow expected range, so the stock has less distance to travel before the trade moves into profit.

The risk is that IV stays low and the stock price stays subdued, in which case time decay erodes the position.

IWM Long Strangle

Traders that think IWM stock might make a big move over the next few weeks could look at a long strangle.

As a reminder, a long strangle is a combination of an out-of-the-money long put and an out-of-the-money long call.

For IWM stock, a September 18 put with a strike price of $290 could be bought for around $7.32.

Then the long call, placed at the $300 strike, could be bought for around $6.67

In total, the long strangle will cost around $13.99 per contract or $1,399 of premium.

The breakeven prices are $276.01 and $313.99. This can be calculated by taking the strikes and adding or subtracting the premium paid.

If price action explodes, then long strangles will work well. However, if IWM stock trades in a small range, the trade will suffer losses.

The expected move for the September 18 expiration is currently $277.95 - $309.63.

Conclusion And Risk Management

One way to set a stop loss for a long strangle is based on the premium paid. In this case, we paid $1,399, so we could set a stop loss equal to half the premium paid, or a loss of around $700.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.