Why IWM could be the Perfect Stock for Option Trading

Why the Russell 2000 (Small-Cap – IWM) could be the Perfect Stock for Option Trading.
The Russell 2000 (IWM) is the most widely recognized index for small-cap publicly traded companies.   The Russell 2000 Index contains the smallest 2000 stocks (based on market cap) held by the Russell 3000.  Because of the small size on its component stocks, it represents only 7% of the value of all U.S. equities.  The average firm carries a market cap of just under $1 billion.

For many reasons, I believe that IWM is the perfect underlying stock for trading stock options:

1) Since I am dealing with the weighted average of 2000 stocks, I am not exposed to the possibility that a single bad news event for one company will cause the value of my holdings to plummet in a single day.  (And I don't have to worry about picking the right individual stock).

2) There is plenty of liquidity in these options (they are more actively traded than just about any other option).  This means that there is a small spread between the bid and asked prices (compared to options for individual stocks), so I will be able to get good prices.  (For most other stocks, there may be only a single market maker trading in those options, and it is rare to get a better price than buying at the asked price, and selling at the bid price.

3) There are strike prices at each dollar increment for IWM, giving me far more flexibility than is possible with other stocks having strike prices $5 or more apart.

4) Options trade in penny increments.  Most options trade in $.05 increments if the price is under $3.00, and $.10 increments if over $3.00.  Starting in 2007, IWM and a handful of other options began trading in penny increments.  This means that transaction costs are often significantly less when trades are made.  Since you usually have to pay the asked price when you buy an option, and it is immediately worth the bid price (since that is what you could sell it for), every trade includes what we call a bid-asked-spread-penalty.  With IWM, this penalty is usually considerably less than with most other options.

5) The component companies of the Russell 2000 are changed on a regular basis.  Once a year, the selection of companies changes.  Weaker companies are taken off the list, and stronger companies added to it.  Assuming that stronger companies continue to improve, and weaker ones continue their downward pattern, the net effect of these adjustments causes an upward bias to the performance of IWM.

6) According to several CPA's I have spoken with, options on IWM, (as well as QQQQ, DIA and SPX) are considered to be Section 1256 equities (although they are not specifically mentioned in the statutes).  If so (and the IRS has told these CPA‚s that they are indeed 1256 equities), special tax advantages are available. No matter how long you own an IWM option (even for one day), 60% of your profits are considered to be long-term capital gains, and taxed at a maximum of 15%.  Furthermore, the options may receive mark-to-market accounting treatment which means you do not have to match up each option purchase and sale when preparing your tax return.

For many years, I believed that the best underlying stock for option trading might be QQQQ, the tracking stock of the NASDAQ 100 - the 100 largest non-financial companies traded on the NASDAQ. Microsoft is the largest of these companies (and makes up about 11% of the average).  

However, there are several reasons why IWM is even better than QQQQ.  The absolute price of IWM is about double that of QQQQ, option prices are generally higher, and IWM has out-performed QQQQ over the past several years.  Even more importantly, from my personal experience, QQQQ has fluctuated in both directions more than IWM has, and such fluctuations are what give the 10K Strategy the most difficulty.

We have also had excellent success with another index-tracking type stock – Oil Service Holders Trust (OIH) which has many of the advantages of the better-known indexes (e.g., IWM and QQQQ) but excluding the possible tax advantages, and also enjoys even higher option premiums.

The OIH index is made up of 18 companies serving the oil industry – drilling, exploring, repairing rigs, etc.  We have carried out three 10K Strategy portfolios using OIH as the underlying in the last three years, and each one has gained 70% annualized.

An investment marriage made in heaven –OIH and the 10K Strategy.   In combination, I believe that they will provide extraordinary annual returns for many years.  The 10K Strategy has been my bread-and-butter strategy for more than two decades.  You have seen how it worked with Fannie Mae, and I will show you how we used it to make 196% with QQQQ in 2003, and how we doubled our money with Apple Computer in 2005 in only 4 months.

I have made a good living using this strategy, year after year.  Now I want to share that strategy with you.  If you respond in 3 days, by Monday, August 25 , you can take advantage of my special offer:

Become a Terry‚s Tips Insider, pay only $79.95, and receive my 72-page White Paper which explains my favorite option strategies in detail with complete Trading Rules for each, including the 10K Strategy that earned over 200% with Fannie Mae in a single year, and get all these benefits absolutely free.

1)    My special report, "How the 2005 Apple Portfolio Doubled in 4 Months," with every trade itemized, and an explanation of how it was made in accordance with the Trading Rules for the 10K Strategy – 23 pages of valuable real-time option trading advice, a $50.00 value in itself

2)    Two free months of my Stock Options Tutorial Program service (a $49.90 value).

3)    Weekly updates on several actual portfolio accounts with every trade ever made in each one. Each account is a real-time unfolding of one of the basic strategies developed in the White Paper.  Different underlyings or investment amounts are used for each portfolio

4)    If you would like, I will email you with every trade I make in each of these accounts, so you can make those same trades yourself if you wish, maybe at even better prices.

To take advantage of this Special Offer, you must order by midnight on Monday, August 25.    Select Option #1 and enter Product Code 196.  Click on https://www.terrystips.com/secure/order.php to join.

It may be the best investment move you ever make – for less than 1 share of IWM.  Think about it.  Terry