So far this year it has been a pretty wild ride for the stock market. The Dow Jones Industrial plunged 2,600 points from the beginning of the year down to the March low and then climbed back up over 2,400 points to the early June high. The S&P dropped from a January high of 943 to a March low of 666 only to rebound to a new high of 956 on June 11th. Similar volatility occurred with the other major stock indexes. Though volatility did not attain the historical heights achieved in late 2008, they remained uncharacteristically high as the markets fell to the March lows. The unemployment numbers reported this week appeared to surprise investors. Many analysts had surmised that the slowing rate of unfavorable economic data foretold an imminent economic recovery. But the U.S. economy shed jobs at a faster pace in June than in May, suggesting that the turnaround in the economy may take longer than many people expect. Also, it did not help that following a large confidence boost in May, in June consumers grew direr about their present and future socioeconomic prospects. On Tuesday the Conference Board reported that consumer confidence slid in June as people have become worried about job security and the economy.
Position Update
Bear Call Spread
With two weeks until the July option expiration date we will consider opening another SPY Bear Call 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)! Also, we need the short strike to exceed the redefined resistance levels:
$95 calculated based on previous closing highs and technical resistance levels
Bull Put Spread
Risk Analysis Maybe the most telling indicator of the probable direction of the SPY is the 5 distribution days in recent weeks. Sell offs on higher volume signal selling by institutional investors. Volume is a reliable technical indicator because it signals what the big money managers are doing and represents over half of the market volume on a given day. Unlike moving averages and oscillators, which are lagging indicators, volume is a leading indicator. But, we still need to wait and see what hand the market will play. It is still a little early to confirm whether the next high volatility medium-term move is going to be north or south! This was a short trading week because of the holiday and we are entering the summer months which normally have relatively light volatility compared to other times of the year. Since the SPY has been contained in a narrow trading range for a few months the benefit for us is that premium is eroding from our sold options (money we hope to be able to keep). 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 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 Iron 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 following the Exit Rules described above. Final comment We still have 14 days until the July option expiration date and the situation can change in a hurry. We will continue to listen to and understand what the market is telling us and manage our risk accordingly. Whichever direction the market goes we have a ready exit and are planning our next move! Have a happy and safe 4th of July celebration! Gregory Clay
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