There was some interesting news generated from the two-day Federal Reserve retreat in Jackson Hole Wyoming that brought together top officials from thirty-five central banks. It was reported that the general consensus is the worst of the economic crisis is over and the economies of France, Germany and Japan have emerged from the recession and the U.S. appears to be turning the corner as well. However, it was also mentioned that thus far the recovery is built on government life support and there is a question of sustainability.
Economic reports due next week should help determine whether this bull market still has fresh legs. Data will be released on the preliminary estimate of U.S. GDP, Consumer Price Index, durable goods orders, and new home sales. There will also be fresh numbers on personal income and consumption that will evaluate the mood of US consumers, who remains the weak link in the recovery.
Listed below is the status of our SPY Iron Condor trade as of Friday August 21st. This position was open for 38 days:
The entire position lost $630 last week â€“ the realized loss for August expiration month Iron Condor is $3,530
SPY closed at $102.97 up 2.1% for the week
30-day historical volatility is lower â€“ which bullish, implied volatility is stable
SPY is well ABOVE its 200-day simple moving average (see SPY chart)
SPY is trading ABOVE its 50-day simple moving average, 20-day EMA and 20-day Bollinger Band SMA(see SPY chart down below)
Relative Strength Indicator (RSI) is bullish See Spy chart below
Moving Average Convergence/Divergence (MACD) downward momentum has stopped and is starting to turn up See Spy chart below
Bear Call Spread
August turned out to be an extremely challenging month for market neutral trading strategies like the Iron Condor. A recap of what happened with the call spread side of the Iron Condor: the market accelerated up immediately after opening the position and we had to do a trade adjustment to roll out to a higher short strike price. The adjusted call spread maintained breakeven for most of the past month, and earlier this week displayed a large unrealized gain. The SPY price recovered a bit during the middle of the week but big Ben Bernanke's comments Friday morning apparently influenced the market to gap up at the open. Options expired on Friday and price action limited our flexibility. The opening gap immediately penetrated our short strike, never reversed, and we had to close the short call to avoid being assigned. We ended August with a $4,580 realized loss on the Bear Call Spread.
If one places value in the concept of "timing is everything" the events of the past month can probably be considered an example of "bad timing". Last week's commentary mentioned "Upcoming is option expiration week so it could be interesting" and it ended up being very interesting. I doubt many people were actually anticipating Friday's market surge, but violent gaps up or down happen often on the days leading up to expiration day. It gets back to the reality of the market oftentimes behaves unpredictably; sometimes this is actually to our benefit, but when the situation evolves to an unacceptable risk we need to accept the facts as they are and make the necessary adjustments to limit the loss.
Bull Put Spread
The Bull Put spread was closed out a month ago for an approx. $1,050 profit (this profit helps offset the loss from the call spread) . Based on market conditions after closing out this spread, it appeared probable that we would have an opportunity to put on another put credit spread trade, but the opportunity did not present itself.
The past month the only risk we had to manage was the threat to the $102 short call strike. Several days prior to option expiration day there was only an approx. 15% calculated probability of the short call being penetrated. Recently the market has basically ignored negative economic data and responded favorably to positive pronouncements. And on the last day of option month Fed Chairman Bernanke's comments sent the market into overdrive and due to the timing of his announcement and price volatility afterwards, our low probability risk converted into a realized loss. Accept for the very last day of the option month, we were able to avoid problems with the adjusted call spread. But unfortunately for us, option expiration is the day that counts the most!
As mentioned above, the August Iron Condor was closed out with a $3,530 realized loss ($4,580 loss on the call spread offset by the $1,050 gain on the put spread).
August was a difficult month for our Iron Condor because of the price volatility that began after the opening trade and the volatile activity on the very last day of the option month. Also, we thought that we might have a chance to generate more premiums from opening another put spread, but the opportunity did not materialize. Part of the process of becoming a better trader is analyzing past results and thinking about what we could or should've done differently. We could easily look at the past month and ponder how the results might have been different if it were not for a few days when the market moved excessively. But the bottom line is that we have to take bad days along with the good and try to factor in market excesses when refining a risk profile going forward. As discussed in previous articles it is not so important that we guess the market direction, but our trading strategy depends on understanding and managing risk.
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.