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This article serves as a timely reminder to readers who are trading Russell 2000 Index (RUT). My purpose of writing this article is to make you aware of how RUT has behaved recently. I understand that some of you are interested in my Big-Mouth-Iron-Condor [BMIC] System and some of you have asked me why I am using RUT exclusively for this system. Now, if you can appreciate what I am going to discuss below, perhaps you will understand why. No doubt RUT has been quite volatile over the past few months, and for that matter, I also notice that some traders lost money in trading BMIC system recently. However, my question put to you, the traders, is whether you have approached this system correctly. Have you missed out on anything?

So, let me make my submission here and it is a fairly simple one. That is, before you embark on trading the BMIC system, your first question should not be how to construct the trade. Obviously, as the name suggests, the BMIC system is founded on an iron condor strategy, which is simply constructed by selling an out-of-the-money [OTM] put spread and selling an OTM call vertical spread. All right, you caught me. It can also be constructed by selling an OTM strangle, and buying a far OTM strangle. No matter what, it is just a trade with four legs. Isn’t it?  

To me, the more important question, and in fact should be your very first question, is how RUT has performed over the past year, past 3 months, and past week. You need to know. How can you trade something without having an opinion?  Now, let’s go back to the earlier question as to why I only trade the BMIC system using RUT. My answer is simple – if you understand how RUT behaved over the past 2 years, you will note that it has been trading in a range.

Chart 1: Weekly Chart of RUT since 2006
(Source: Profitsource)
Click here for larger view

If you look at the weekly chart of RUT (see Chart 1), I hope you will agree with me that it has been in a trading range since 2006. Given the nature of the BMIC system, a 200-point range in my view can be considered as a range bound. If you agree with me, you will understand why I pick RUT as my preferred asset for the BMIC system. It may sound weird, but at least this is my opinion.

Now, apart from looking at the weekly chart, I also closely monitor the daily chart of RUT in order to have a complete picture. In Chart 2, I am sharing with you a fairly simple technical analysis of RUT’s daily chart showing the various near-term support and resistance levels over the past 3 months (see Chart 2).

Chart 2: Daily Chart of RUT since Oct 2007
(Source: Profitsource)
Click here for larger view

While I understand that some of you may not be concerned with technical analysis (yes, you may have heard from others the key success to this trading system is to focus on what the best delta for the option you wish to sell and buy), I humbly submit that with the recent volatility in the market, you need to adjust this thinking process. While I agree that you should pay attention to the ‘delta’ question, it is not in itself conclusive. You need an opinion. This is precisely Habit 3 of Tom Gentile’s 7-Habits of Highly Profitably Traders (which refers to the need to adapt to the system changes). In my view, I am applying Habit 3 to fine-tune the rules I set for the BMIC system so that it will still work in the current market volatility.

If you look at Chart 2, at the time of writing, RUT has retraced from its recent low at 650 by 38.2%, which is a key Fibonacci retracement level. The next important resistance level could be 735. You may apply other forms of technical analysis but for me, I am simple man. I only do very basic technical analysis to avoid analysis paralysis.

Now that you have a better technical outlook on RUT, you should then be in the position to have an opinion of RUT, thereby enabling you to decide whether you should give some directional bias on the BMIC. Please understand that I have never said that a BMIC must be created with delta neutrality. Be flexible, and be realistic. Indeed for the last three BMIC I did, I took into account some directional bias. This is partly why I love to refine my rules on BMIC system constantly. In fact, as a system trader, this is my job to improve the system as and when the market conditions change, and that perhaps explains why I still survive in this volatile market and this system continues to be profitable.

So, don’t take the BMIC rules as they were first discussed. Start thinking about whether you need to adapt to the system changes that suits your circumstances. If you haven’t, perhaps this article serves as a wake-up call, and hence my purpose.


Jack Wong 
Staff Writer
Optionetics.com ~ Your Options Education Site

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