Market Summary
The Sept. 25th Couch Potato Market Summary mentioned " Thursday the S&P 500 registered a bearish "distribution day", which is the first clear indication of institutional selling in weeks... some folks are detecting a change to bearish sentiment beginning to gain momentum. " The S&P has follow up with several more bearish distribution days (losses on higher than normal volume) which many people feel represents institutional selling and signifies a change in market sentiment. But it remains to be seen whether technical indicators convert to a longer term downtrend.

Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday October 2nd. This position has been open for 7 days:
The entire position is $350 in the black
SPY closed at $102.49
30-day historical volatility is stable, but implied volatility is turning bearish by trending up
SPY dropped BELOW its 14-day EMA (see SPY chart down below)
SPY is also trading BELOW its 20-day Bollinger Band SMA (see SPY chart)
SPY is basically EVEN with its 50-day SMA (see SPY chart)
SPY is still ABOVE its 200-day SMA average (see SPY chart)
Relative Strength Indicator (RSI) has turned bearish (see SPY chart)
Moving Average Convergence/Divergence (MACD) has bearish momentum (see SPY chart)

Bear Call Spread
This spread is $790 in the black (see tables below)
$109 strike price short call delta is .0960 (90% probability this trade will be profitable)

Bull Put Spread
This spread is $440 in the red (see tables below)
$100 strike price short put delta is -.3175 (68% probability this trade will be profitable)

Risk Analysis
Momentum from the accelerated Bull Run that began in the middle of July has stalled and the market is experiencing a minor correction. Since July the risk to our SPY Iron Condor has been market surges threatening and/or penetrating the short strike on our Bear Call spread. But the scenario has changed and the most immediate risk to our position is a continued market downtrend threatening the short put on our Bull Put spread.

The Risk Analysis section of the Sept. 13th Couch Potato stated" The market is trading in a short-to-medium term uptrend and is still trading within the upper and lower bull channel trend lines. The question is whether the SPY index will break through the top of the channel and go higher (threatening our short call), or will there be a pullback to the lower level as suggested by overbought indicators?" The market gave us our answer by responding with a pullback. Obviously, the next question is will this be a minor correction or are we in the initial stages of a market downturn? The SPY is currently trading at the lower level of the bull channel and a further breakdown may signal a change in direction.

As mentioned above, the short put on our Bull Put spread is threatened by the recent market downturn. If the threat becomes real (SPY closes below the $100 short put strike price) we probably won't be as patient with unwinding this position compared to a threat to our call spread. A general presumption is that the market falls harder and faster in a downturn versus an upturn (e.g. the November 2008 to March decline). Also, we only have two weeks until our October options expire and we should try to avoid getting trapped with a losing hand during expiration week.

Exit Plan
We will follow the standard exit plan for our Iron Condor:

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 one of our short strikes is penetrated (closing price above our short call or 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 one of our short strikes has been violated and there is no price reversal, we cut our losses and live to fight another day.

We initiated the SPY Condor as one order with four legs. Exiting this position prior to expiration we will probably “leg out” of the trade by first unwinding either the bear call spread or the bull put spread; and close out the other side of the spread as a separate order. The timing of closing out each side of the Iron Condor is dependent on following our Exit Rules described above.

Final comment
Let us not get too hung up on trying to predict where the market will be in the future. As opined previously, the market is like a very good looking woman, they do what they want, when they want, no matter what anybody else thinks, and they can get away with it! How many of the “experts” predicted the extraordinary run-up in the S&P following the March 2009 bottom? Maybe these are the same “experts” that warned us of the impending October 2008 to March 2009 stock market crash? The point is that it should not matter what the market does because 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.