How to Make 15.6% in the Russell 2000 ETF Over the Next 35 Days

I want you to think about the last stock you purchased.
Now think about why you chose to buy stock in that company.
Certainly, you did your due diligence. You know the revenues, profits and expenses, and of course its five major competitors and main suppliers. You wouldn’t dare buy a stock just by looking at the chart.
Unfortunately, most individual investors can’t answer any of those questions. Yet, investors will invest their life savings in a company they know very little about. But who really knows the answers to those questions? Experts, of course. There are facets of a company that analysts will spew out that you never knew existed.
But frankly, who cares.
Knowing everything you can about a company and making money are two different things. And confusing the two is where most investors, individual and professional alike, are led astray.
It’s all fugazi. Those of you who have seen “The Wolf of Wall Street” know what I’m talking about. Sadly enough, the majority of investors are sold a story and nothing more. In many ways it’s what Wall Street was built on. Believe me, I’ve heard the fine-tuned pitches based on nothing but an attention-grabbing story.
And that is exactly why I use options.
I’m not going to allow a story to define how I invest my hard-earned money. I make investment choices based on a “mechanical” approach of evaluating hard statistics: mean reversion, probability of profit, maximum risk/return and expected return. Before I make any investment decision I know the exact percentage of each statistic mentioned above. Again, no stories or the soft data we are accustomed to seeing from the financial community – just hard statistics.
Let me take you through the process of how I evaluate each and every investment I make using the iShares Russell 2000 ETF (NYSEArca: IWM) as an example.
As you probably know, IWM has pushed lower the last few weeks and into an oversold state.

Once an oversold or overbought extreme occurs, the question I always ask myself when looking at a potential option trade is, “What is the most I can make or lose on this trade?” Fortunately, in the world of options the numbers can easily be calculated so that you can make a logical decision based on your risk/reward tolerance.
With IWM trading for roughly $109.97 and in an oversold state, I want to sell a few vertical put spreads, or bull put spreads, in IWM. A vertical put spread is an options strategy for those who are bullish or neutral on a stock over the short term. In fact, the stock can actually move slightly higher and you will still make a max profit.
I can sell the vertical call spread for $0.27, or $27 per spread, for a 15.6% profit over the next 35 days. The max risk on the trade is $173. At first glance the risk/reward seems off to those new to options. I always get the same question, “Why would you risk $173 to make $27?”

This is where the second question comes into play, “What are the chances that this will be a profitable trade?”
The answer is simple: the trade has a more than 78% probability of profit. In fact, I can cater each of my trades to fit a certain probability of profit so I always have an overwhelming edge. Basically, by selling options – rather than buying options like most investors – I can create an enormous margin of error.
In this case, as long as IWM doesn’t push past the spread’s short strike of $104 I will make a max profit on the trade. That’s a margin of error of almost $6. I challenge investors to find a trade that allows you to be directionally wrong by almost 5.5% and still make a profit.
Again, this is why I sell options. I compare selling options to being the house in a casino, but with significantly better odds. And as we all know, the house always wins over the long term.
Finally, I would ask, “What is the expected return for this trade, taking into consideration the max risk/reward and probability?” The expected return would be 15.6% ($27/$173*100).
I hope a few of you will decide to take the plunge and at least investigate the true power of options. If you would like to learn more about my high-probability approach to selling options, please take a look at my most recent webinar where I discuss several trades in real time. Moreover, I go over, in great detail, my step-by-step approach to selling vertical spreads.