Will RTH continue to strengthen or has the steam come out of the retail sector ?
If we consider that the wave 3 high is near to completion, we could aim to buy a cheap OTM Fly at $80 which equates to the 61.8% retracement point.
Right now the implied volatility against the Statistical volatility is very high indicating options on the RTH are very over valued and that we should be selling premium - hence the Butterfly.
The problem here is that if we place the Fly at the OTM $80 mark we get a cheap trade and as the price retraces into the mouth of the Butterfly we will gain in value. Additionally we will gain in values by Theta decaying over the life of the trade as we hve sold premium in the trade.
The issue I have with this strategy is that as RTH retraces and goes lower, IV will essentially rise and thus damage the ROI on our Fly trade. If the retracement is a slow movement rather than a rapid movement, then it may be possible that the gain from Theta will offset the declines caused by rising implied volatility.
