The market has been up and down the day after the big slide as traders appear to be expressing concern about the impact of the weak job market and a reported increase in worker productivity has not removed investors' fear. Stocks are trading in a tight range after the S&P and Dow plunged on Tuesday due in part to worries about the financial sector and concerns that the six-month rally of more than 50 percent is overextended, therefore traders are locking in gains. The market also retrenched a few weeks ago, but this time buyers have yet to emerge to push stocks higher. Many analysts expect trading to remain erratic through the fall, which is historically a rough time for stocks.
Listed below is the status of our SPY Iron Condor trade as of mid-day September 2nd. This position has been open for 8 days:
The entire position is up $510
SPY was trading at $100.24 at mid-day
30-day historical volatility is low â€“ which bullish, implied volatility is edging higher
SPY is still ABOVE its 200-day and 50-day simple moving averages (see SPY chart below)
SPY is dropped below its 14-day EMA and 20-day Bollinger Band SMA (see SPY chart down below)
Relative Strength Indicator (RSI) turned neutral and is heading down (see Spy chart below)
Moving Average Convergence/Divergence (MACD) has turned bearish (see Spy chart below)
Bear Call Spread
We are closing out this entire spread today - for an approx. $980 profit (see tables below)
With four weeks until the expiration date for the September quarterly option series we will consider opening another SPY Bear Call spread IF we can satisfy our original trade criterion - generate a minimum .50 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:
$104 calculated based on previous intraday highs and technical resistance levels
$107 equals the upper price level of our 80% statistical probability range
$104 is the upper level of the Bollinger Band â€“ Solid purple line in the SPY chart above
Bull Put Spread
This spread is $540 in the red (see tables below)
$97 strike price short put delta is -.2909 (71% probability this trade will be profitable)
Since we closed out our short $107 strike call, the only risk we have to manage is the $97 strike price sold put. The risk associated with the sold put will be evaluated and resolved based on the Exit Plan below
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 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.
We still have 17 days until the regular September option expiration date and 28 days for the quarterly options. As evidenced by market activity in July and August 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!
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.