Small caps have finally broken out from their resistance level with the Russell 2000 (RUT) so far holding above the important 1220 level.
Bullish momentum may carry the index another 2-3% higher, but that should be about it. The RUT has rallied from 1153 to 1232 for a gain of 6.85% in the last 16 trading days.
For traders that think this rally might have another small leg higher, a bullish butterfly could make sense. 1250 seems like a logical target and a nice round number for the small caps to aim for.
On the chart, the Relative Strength Index (RSI) is not yet at an overbought extreme, currently sitting at 63.54 with plenty of room to move higher. Stochastics are starting to look a little top heavy though. The technicals fit nicely with the prospects of a bullish butterfly options trade.
RUSSELL 2000 (RUT)Â Chart
A bullish butterfly could involve buying 1 March 19th 1230 calls, selling 2 of the 1250 calls and buying 1 of the 1270 calls.
Currently the net cost of this trade is around $500, and that is the maximum the trade would lose if it doesn’t work out.
The potential return is $1,500, offering a nice 3-1 risk/reward ratio.
Russell 2000 Bullish Butterfly Options Trade
If the Russell 2000 were to fall back below 1220 on a closing basis, this trade could be closed early with minimal damage.
Thanks for reading.
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Author has a position in RUTÂ at the time of publication. Â Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
