“The Russell 2000 is trading at its highest levels since 2007, but today’s unusual option activity is bearish. The iShares Russell 2000 Index ETF (NYSE:IWM) trades at $78.96 this afternoon, up fractionally on the day. It hit an intraday peak of $79.28, its highest level since December 2007, and has traded just below that since. Shares have run up from support at $89 in late August and are up 125 percent from the March 2009 lows,” Chris McKhann Reports From Option Monster.

McKhann goes on to say, “Leading the day’s option volume in the (NYSE:IWM) is a March put spread. A trader bought 19,000 of the March 77 puts for $2.93 and sold the same number of the March 70 puts for $1.23. The volume at both strikes was more than three times open interest. This spread cost $1.70 to open, which is the maximum risk for the trade. The potential gain is $5.30 if the IWM is below $70 at expiration.”

“Put spreads like this take advantage of the option pricing “skew.” That is, the implied volatility is 25 percent for the 77 puts and 30 percent for 70 puts. The IWM is a very popular trading product, so this position could be tied to a host of possible strategies. Or it could simply be a hedge on a long shares against a pullback of as much as 10 percent,” McKhann Writes.

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