Market Summary
It was reported that approx. 15 million Americans are out of work, 5 million of them unemployed for longer than six months. Businesses have eliminated over 7 million jobs since the recession began in December 2007, erasing a decade's worth of job gains. Job losses have slowed in recent months, but workers are still losing jobs. We may have a jobless economic recovery; therefore the near-term employment picture remains shaky. But before President Barack Obama can do much about it, he'll have to manage recessionary fallout including unemployment that even his advisers said is still heading for 10 percent. The Congressional Budget Office director made a comment saying "if Congress doesn't reduce deficits, interest rates are likely to rise, hurting the economy. But if Congress acts too soon, the economic recovery — once it arrives — could be thwarted."

Vice-President Joe Biden and the White House crew keep telling us that the economic contraction would have been far worse without money from the $787 billion economic stimulus package that the president pushed through Congress as one of his first major acts. The fact that they feel the need to keep reminding us suggest that folks might be a little skeptical, especially the unemployed. Since unemployment benefits play an important part in stabilizing the economy because recipients tend to spend their weekly checks, rather than saving the money or paying down debt, maybe the government should offer a stimulus plan for the unemployed?

The excessive deficit numbers also could complicate President Obama's plan to persuade Congress to enact a health care system overhaul. Some people have suggested a novel idea - maybe the White House and Congress should focus energy on a stimulus plan to put people to work, e.g. a public works plan to rebuild our crumbling infrastructure and schools. This is a government expenditure people can see and feel, and it should be easier to keep track of how funds are spent. Also, if workers have decent jobs, then they will probably have health insurance and a "government option" becomes less critical. And since workers pay taxes and spend money on goods and services that also pay taxes, this would be a start to reducing federal and state government deficits. This may sound like a unique concept, but it just might work?

Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday September 4th. This position has been open for 10 days:
The entire position gained $830 last week - to $1,340 in the black
SPY closed at $102.06 down 1.2% for the week
30-day historical volatility is lower – which bullish, implied volatility is edging up a little
SPY is well ABOVE its 200-day and 50-day simple moving averages (see SPY chart below)
SPY is trading ABOVE its 14-day EMA and 20-day Bollinger Band SMA (see SPY chart down below)
Relative Strength Indicator (RSI) is neutral but turning up See Spy chart
Moving Average Convergence/Divergence (MACD) has turned bearish See Spy chart below

Bear Call Spread
We initiated the SPY Iron Condor trade on August 26h and closed out the Bear Call spread at $980 profit on September 2nd

With over three 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 defined resistance levels:
$104 calculated based on previous intraday highs and technical resistance levels
$105 equals the upper price level of our 80% statistical probability range
$104 is the upper level of the Bollinger Band – Solid purple line in the SPY chart above

Bull Put Spread
This spread is $360 in the black (see tables below)
$97 strike price short put delta is -.1594 (84% probability this trade will be profitable)

Risk Analysis
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.

Despite the minor pull-back this past week the market is still in a short-to-medium term uptrend. The SPY has yet to penetrate the $104 resistance level as defined by the 38% Fibonacci retracement level of the November to March decline and the upper channel of the Bollinger Band (see SPY chart down above) . This past week the price dropped down to the $100 support zone area but stayed within the upper and lower bull channel trend lines. Technically, as long as the SPY trades above $98 the uptrend will stay intact. Regular readers of the Couch Potato know that the best case scenario for us is a market surge that will provide the opportunity to open another call credit spread to generate even more premium.

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 another option series (either the September quarterly or regular October). Unless this is option expiration week, no need to overreact 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
In the Bear Call Spread section above we mentioned opening a September quarterly series credit spread. Quarterly options as the name suggests are options with quarterly expiration months and are listed for the nearest 4 quarters and the final quarter of the following year. Quarterly options trade exactly like any other standardized exchange traded options except for the fact that they expire on the final trading day of the expiration month and not on the 3rd Friday like regular options. Quarterly options are actually designed for the hedging needs of institutions with quarterly accounting practices. As such, only the most important and heavily traded ETF's have quarterly options listed.

The benefit of a quarterly options compared to the standard version is that as of the September 4th analysis date, we have an extra 12 days to work with compared to the regular September option expiration day. Many traders love quarter months because if you decide to do a trade adjustment, rolling out to options that expire on the last day of the month provides more flexibility. For example, for our desire to re –enter a September call spread there may not be a suitable opportunity within the two weeks prior to the regular expiration day. However, with the end-of-month quarterly expiration there is a higher probability of a chance to enter another credit spread. And depending on market behavior and the impact to our September quarterly options, we have the flexibility of rolling out to the regular October option series – it helps to have options for our options!

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.