Block Trade Analysis – Russell 2000 Iron Condor

Checking in on trading activity in my favorite index, the Russell 2000, I came across a fairly interesting trade using short dated options from around 11:00 Monday morning. I say around 11:00 because the trader legged into an Iron Condor. A couple of minutes before 11:00 200 of the RUT Mar 6th 1180 Puts were sold at 2.75 with 200 of the RUT Mar 6th 1160 Puts purchased for 1.47 which comes to a net credit of 1.28. At the time of this execution the Russell 2000 was at 1224.52 so it appears the trader has a neutral to bullish outlook for small cap stocks. Well, not so fast…

Four minutes later another 200 lot trade came into the RUT market with a sale of the RUT Mar 6th 1260 Calls at 1.05 and a purchase of the Mar 6th 1280 Calls at 0.30 for net credit of 0.75. I can understand (but usually do not condone) legging into an Iron Condor, but found this interesting since only four minutes went by and the Russell 2000 was only 0.23 higher at 1224.75 when the second trade was executed. I never criticize how other people approach trading, but I’m scratching my head on the method behind this execution.

Regardless of how they got into the trade, some trader has on the RUT Mar 6th 1160 – 1180 – 1260 – 1280 Iron Condor for a net credit of 2.03. The payoff upon next week’s Friday RUT AM settlement is displayed in the diagram below –


The reward here is 2.03 as long as the Russell 2000 settlement comes in between 1180 and 1260 at March 6th  settlement.   A move over 1280 or under 1160 is a worst case scenario with the resulting loss of 17.97.

To give a bit more color to this neutral RUT trade I put together a year to date daily chart of the Russell 2000 along with the chart projected out until March 6th. The break even and max loss levels are highlighted on the price chart along with the percent change to each level based on the Russell 2000 at 1224.

RUT Chart

Basically this trade works out perfectly (if held through March 6th settlement) as long as the Russell 2000 is not 2.9% higher or 3.6% lower. The worst case scenario is a bull run of 4.5% or a drop of 5.2%.  We’ll check in on March 6th and see how things worked out for this fairly wide RUT Iron Condor.