Editor's Note:

The stock market is chopping sideways in a range as investors wait for some sort of deal/no deal headline out of Europe this weekend. There is a LOT of headline risk for both bulls and the bears. Stocks could see a big move either direction based on what happens in Europe this weekend.

We are going to try and take advantage of this volatility with a market neutral option strategy called a strangle. You could also try a straddle (buying a call and a put at the same strike) although I usually find that straddles are too expensive.

Instead of using the IWM small cap ETF you could also try a strangle on the S&P 500 ETF (SPY), Dow Industrials (DIA), the midcap ETF (MDY), the NASDAQ-100 ETF (QQQ) or you could try this strategy on similar double (2x) ETFs.

- James


NEW MARKET NEUTRAL OPTION PLAYS

iShares Russell 2000 ETF - IWM - close: 69.62 change: +0.19

Stop Loss: n/a
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The U.S. stock market is churning sideways as investors wait for some sort of deal out of the EU summit this weekend. High-level talks actually start tomorrow but the official EU summit in Brussels is on Sunday. Then there is the deadline for some sort of deal on the EU banks by next Wednesday. The next few days carry a lot of headline risk for both bulls and the bears. One of the biggest risks is that these meetings actually get postponed. That was a problem this morning with rumors the EU summit might get pushed back.

If there is any sort of deal then stocks could rally higher and breakout past major resistance. If there is no significant deal then stocks are likely to plunge and drop toward their August or October lows. Whatever happens there is a good chance that stocks will see a significant move over the next several days.

We are suggesting that traders launch a neutral strangle position on the IWM tomorrow (Friday) morning with November options.

FYI: A strangle involves buying both an out of the money call (OTM call) and an out of the money put (OTM put). The expectation is that the underlying equity (IWM in this case) will move enough to make one side profitable and cover the entire position and then some.

- Suggested Position -

Out-of-the-Money Call option:
Buy the NOV $72 call (IWM1119K72) current ask $1.94

- and -

Out-of-the-Money Put option:
Buy the NOV $68 put (IWM1119W68) current ask $2.81

Annotated Chart:

Entry on October 21 at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 89 million
Listed on October 20, 2011