The small-cap benchmark Russell 2000 is a swing trader's dream. Here's how to trade it with options. Although it is very volatile and exhibits wild swings, in the 1-year daily chart shown below, it becomes evident how confined its movement is within a well-defined trading range.
The index frequently fluctuates between established support and resistance levels. Whenever it breaches one of these levels, it quickly stabilizes in a new trading range. Currently, the index's range lies between 2260 and 2100.
Recently, on 9/19, it encountered resistance at 2260 and has since started a pullback. Based on this analysis, I am considering a bearish set-up while keeping the top of its current trading range in mind. The trade Given the bearish outlook, I'm using a call credit spread as my trade structure.
The set-up involves selling a $2,260 call option, strategically placed at the current resistance level. To limit potential risk on the upside and define the trade's maximum loss, I'm simultaneously purchasing a $2,270 call option. A review of the Russell options chain indicates that there is a 70% probability of the price remaining below $2,260 at expiration, providing a strong probability of success for this set-up.
This trade offers a potential premium gain of $300, with a possible loss capped at $700. If the index stays below $2,260 by the expiration date, the trade will yield an ROI of 42% on the capital risked. Here is my exact trade setup: Sell $2260 call, Oct 11th expiry Buy $2270.