Small Cap Network Blog

I’ve been sitting on this trading idea for a few days now, not really sure how I wanted to play it. I knew the market was overbought, and I knew it was ripe for a reversal. What I wasn’t clear on was which index to trade…lately there’s been a bizarre disparity between the Dow, Russell, NASDAQ, and the S&P 500. Buying put options on one isn’t the same as buying put options on another.

After doing some math, I think the biggest downside potential lies with the Russell 2000. So, I’m buying some puts on it….the September 730 puts (RUTUF), at a price of 20.90. With the index currently trading at 724.36, that strike’s about 5 points in the money. The cost is about $2090 per contract.

Basically what I’m looking for is more range-bound action. The Russell 2000 has been bouncing between 760 and 650 for several weeks. I think the recent encounter with 760 spoke volumes, and it now looks like we’re pointed back down again.

I’ve got a feeling the late-summer doldrums are going to let the index slide all the way back to support at 650. If that happens, my Russell 2000 puts will be worth $80, or $8000 per contract. That’s about a 300% gain…if it works out. As always, I’m not getting married to this trade - I’ll bail if I start to lose too much ground. Defense is more important than offense.

I’ll be tracking this trade in the blog, if you want to virtually stand over my shoulder as I assess it each day.

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