On Wednesday, the Federal Reserve cut its key interest rate by 0.25% to 3.5%-3.75%, projecting only one more cut in 2026 due to job growth and inflation concerns. Stocks surged on the news, with the S&P 500 and Nasdaq 100 indexes reaching multi-week highs. Unusual options activity showed high put volume for ETFs like IEF and IWM.

Small-cap stocks, particularly IWM, have outperformed the SPY since November. IWM saw three active put options, suggesting a possible covered strangle strategy. Covered strangles combine covered calls and cash-secured puts for income generation and risk management. Schwab notes that this strategy provides predetermined selling and buying points for traders.

Investors interested in a buy-on-the-dip strategy may consider covered strangles for better entry points. Three put options for IWM stand out for potential covered strangle setups. The Jan. 9/2026 $252 put offers a 20.5% annualized return, while the Jan. 16/2026 $243 put provides a 9.9% return with a higher profit probability.

The Dec. 26 $233 put for IWM has a high Vol/OI ratio and offers a potentially good entry point with limited flexibility for covered calls. The bid prices for these puts range from $0.57 for the $267 strike to $4.29 for the $252 strike, providing various annualized returns. The quarter-point rate cut should benefit small companies like IWM. The covered strangle strategy on Jan. 9 offers tempting dollar amounts, but consider if you’re after income or buying more IWM at lower prices. The Dec. 26 covered strangle may have the lowest annualized return at 7.3%, but it could be the best choice in this scenario. Will Ashworth did not have any positions in mentioned securities.

Read more at Barchart: This 1 Unusually Active IWM Put Option Screams Covered Strangle