Monday, June 22, 2009 8:40:15 PM EDT Calls Closed For A Profit by Gregory Clay Click here to email Gregory Clay

Market Summary
There was no major economic data released Monday, but the market may have been spooked by the announcement that the World Bank estimated the global economy will shrink 2.9% in 2009 (It previously predicted a 1.7% contraction). Also the market is coming off its first weekly loss in more than a month after mixed economic signals last week.

Position Update
Listed below is the status of our SPY Iron Condor trade as of Monday June 22nd. This position has been open for 7 days:

SPY closed at $89.29 (down 3%)
Historical volatility is 22.59%, implied volatility is 24.32% (not considered excessive)

Bear Call Spread
Closed out all this entire position at .10 per share (purchased all 20 $100 strike calls for.12, sold all 20 $105 strike calls for .02) and a $1,020 profit ($1,220 option premium received from opening trade, $200 paid to exit position)

We have over three weeks until the July option expiration date and will consider reopening the exact same spread IF we can satisfy our original trade criterion - generate a minimum .55 net credit on the spread between the short and long strikes AND the short strike should fit our statistical probability profile (80% chance all the options will expire worthless)!

Bull Put Spread
$86 strike price short put delta increased to -.3033 (70% probability this trade will be profitable)
This position is $605 in the red

Risk Analysis
When we initiated the Iron Condor trade there was a short-to-intermediate term up trending market environment, but the situation rapidly changed and we now have a bearish bias from both a technical and fundamental perspective. A comment from the June 14th commentary stated ("The SPY has been trading in a relatively tight range the past few weeks. Typically, the price breakout from a tight trading range (whether to the upside or downside) is very aggressive. " We may find out this week if an aggressive downside breakout has begun. The two-day Federal Reserve meeting begins on Tuesday and yesterday's commentary mentioned "the Federal Reserve Board meets next week and oftentimes volatility increases prior to and after the board meeting"

Also reports are due this week related to home sales, durable goods orders, gross domestic product, personal incomes and spending. The SPY $90 support level has been pierced, will the price continue to plunge or will it snap back?

Last week S&P 500 was down 2.6% - the first weekly loss in almost a month
Volatility indices have gapped up and that is a bearish sign. Relative Strength Indicator (RSI) and Moving Average Convergence/Divergence (MACD) have converted to bearish signals. SPY is treading below its 200-day and 50-day moving averages. SPY is trading below the 20-day EMA and 20-day Bollinger Band SMA.

Since we closed out our short $100 strike call, the only risk we have to manage is the $86 strike price sold put. The risk associated with the sold put will be evaluated and resolved based on the Exit Plan below

Exit Plan
The rules for exiting the Bull Put spread are:

Anytime the market maker is willing to accept a limit price of less than .11 on one of our short strikes, buy back all the short contracts and sell the long positions on the same spread. However, if it is a few days prior to the expiration date, we can hold out for a .05 bid.

If the short put strike price is penetrated (closing price below the short put) AND the delta rises to .65 we will look to close out this spread (buy the short contracts, sell the long) and roll it out to the next month. Unless this is option expiration week, do not panic and rush to close the trade, many times the market will reverse itself and remove the sense of urgency. If the short strike has been violated and there is no price reversal, we cut our losses and live to fight another day.

On option expiration day, if rules 1 and 2 above have not been activated, let the Bull Put spread expire worthless and we keep the entire sold premium for any open contracts where the short strikes are not threatened.

We initiated the SPY Condor as one order with four legs. The Bear Call spread has already been closed. The Bull Put spread will be closed out as a separate order dependent on the Exit Rules described above.

Final comment

We still have 26 days until the July option expiration date and the situation can change rapidly. We will continue to listen to and understand what the market telling us and manage our risk accordingly. Whichever direction the market goes we have a ready exit and are planning our next move!

Gregory Clay

Couch Potato Trader Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.