Another 'nickel trade' in the RUT
Chris McKhann | firstname.lastname@example.org
optionMONSTER systems show that 161,403 RUT options traded on the day, 3 times its daily average for the last month. Most of that action was in a put spread that expires a week from today.
A trader bought 41,000 March 1085 puts for $1 and sold the same number of March 1095 puts for $1.13. Volume was far above the previous open interest in each strike, so this is a new credit spread.
The position takes in a credit $0.13, which will be the maximum potential gain if the RUT holds above 1095. It has a high probability of success as the delta of the 1095 puts is just 0.04, suggesting a probability of only 4 percent that they will be in the money upon expiration at the end of next Friday's session. But the maximum potential loss is $9.87, or 75 times the maximum profit. (See our Education section)
Our systems have found repeated examples of this trade, selling cheap out-of-the-money credit spreads in the RUT. This type of strategy, which takes on a tremendous amount of risk to collect the small premium, has been likened to "picking up nickels in front of a steamroller."
The RUT was down 1.23 percent to 1176.74 yesterday. But it was up at 1212.82, a new all-time high, last week.