Last November, I recommended three unusually active options for the iShares Russell 2000 ETF (IWM). At the time, the Russell 2000 was trading around 1,793. I suggested that investors ride it to 2,000.
The index hit 2,000 a few days before Christmas. It has added nearly 9% in 2024, which isn’t terrible, but compared to the S&P 500’s almost 22% gains year-to-date, the Russell 2000’s 2024 returns are relatively mediocre.
The index follows the performance of 2,000 smaller U.S.-listed companies. These companies are more reliant on expensive debt than large-cap stocks. As Wall Street argued for interest rate cuts, the interest in the Russell 2000 grew. Unfortunately, the interest rate cuts didn’t come until September, dampening investor enthusiasm for smaller stocks.
Veteran portfolio manager Chuck Royce recently stated that the broadening of large-cap markets is good news for small-cap stocks.
“At the end of September, the Russell 2000 had a near-record number of companies with no earnings, a total of 44.6%. Yet, earnings growth for those small-cap companies that have them is estimated to be higher than for large-cap businesses in 2025,” Royce said in early October.
Could 2025 be the year the Russell 2000 rides to 3,000? Maybe. Maybe not.
However, if you’re bullish about small-cap stocks, these three unusually active IWM options will help you place a bet that they will.
Have an excellent weekend!
Call Option #1
The first call option that was unusually active yesterday worth considering has the highest DTE (days to expiration) of 37 days, expiring on Nov. 15, a little over a month from now.
The ask price of $0.94 is a down payment of just 0.40%. You’d spend more taking your family out to dinner. The delta is 0.12369, which means you can double your money by selling before the call expires if it gains $7.60 (3.5%).
Yesterday’s volume on this call was 8,325, nearly five times the open interest. However, IWM gets a lot of volume--yesterday, it was 1.54 million, about 235,000 higher than its 30-day average, so in the big picture, the call’s volume wasn’t unusual.
Looking at the Russell 2000 new highs and lows, the index had 30 stocks hit 52-week highs and 63 hitting 52-week lows, a data point that suggests the index has yet to take flight about a third of the way through 2024’s final quarter.
So, I like the $237 Nov. 15 call because it gives the index a little more time to catch fire.
Call Option #2
In this case, I’ve gone for a tweener—its expiration date is longer than many of the unusually active options yesterday, and it had a high Vol/OI ratio of nearly 30—that combines investor interest with a realistic shot of making money on the bet.
The ask price of $0.98 is a down payment of 0.43% on the $227 strike. Based on the delta of 0.18171, you can double your money if it gains $5.39 (2.5%) within the next 21 days, selling before the call’s expiry.
You’re trading 100 basis points of appreciation for two weeks fewer weeks to expiration. The index gave up nearly 10% in three days of trading in early August. In early July, it gained 11.6% in five days trading.
So, there is no question that IWM can gain 2.5% in 21 days. Whether it does or not remains to be seen, but the upfront financial commitment is just $4 more.
Call Option #3
The final call option expires on Nov. 11, just like the previous call. However, its strike price is $7 lower at $220, and its ask price is more than 2x higher at $3.01, a down payment of 1.4%. That’s still not high. I consider anything 5% or lower to be reasonable.
Now, I don’t want to focus too much on the income side of the trade because the whole point of buying these calls is to own the ETF for the long haul into 2025 and perhaps 2026.
Sure, you can generate income in the near term, but eventually, you’ll want to exercise your right to buy 100 IWM shares. Its all-time high of $244.46 was reached on Nov. 1, 2021, while the Russell 2000 hit an all-time high of 2,458.86 at that time.
The question is whether 2025 is the year it drives to 3,000. If interest rates keep coming down and a recession doesn’t set in -- many feel we’re in a soft landing at the moment -- it looks as though it could be the index’s time to shine.
Worst-case scenario: You buy some downside protection with puts to ensure you don’t get buried by any whipsaw movement in its share price over the next 12 months.
Just a thought.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
