Market Summary
It is very interesting when analyst "spin" economic news and how some people perceive what is reported. One example is the recent job report detailing a seasonally adjusted 33,000 decline from the previous week, but 500,000 workers still lost jobs! And it was mentioned that reading further into this report the "unadjusted" job losses for the week ending Oct. 3rd is 449,375, an increase of 3,757 from the prior week. There were 426,789 jobs lost in the comparable week in 2008. Is this week's job report really a positive if the unadjusted numbers not only report a job loss increase from the previous week, but the number is more than 5% higher compared to last year?

Some retailers are posting the first sales gain in a year. But you might recall last year at this time is when sales began to plummet. So while this past month may have been better than Sept. 2008, can this be interpreted to suggest that sales are good? Even with earnings reports, look at earnings from a year ago and you can surmise that companies have a very low bar to clear to report better numbers. It appears to be a question of one's perspective as to whether these reported numbers are actually good.

Another report mentioned that consumer prices fell 1.5% in August compared to last year. Doesn't this imply that we have deflation and not inflation? And there have been several reported comments mentioning concerns about the FDIC and FHA needing bailouts like Fannie Mae and Freddie Mac. The point is that in the trading business, it is not the actual news that is important, but how traders and investors perceive what they hear.

Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday October 9th. This position has been open for 14 days:
The entire position gained $1,070 this week - to $1,420 in the black
SPY closed at $107.26
30-day historical volatility is stable, implied volatility has decreased which is bullish
SPY surged ABOVE its 14-day EMA (see SPY chart down below)
SPY rose ABOVE its 20-day Bollinger Band SMA (see SPY chart)
SPY is now trading ABOVE its 50-day SMA (see SPY chart)
SPY is still well ABOVE its 200-day SMA average (see SPY chart)
Relative Strength Indicator (RSI) has turned bullish (see SPY chart)
Moving Average Convergence/Divergence (MACD) is beginning to turn up (see SPY chart)

Bear Call Spread
This spread is $410 in the black (see tables below)
$109 strike price short call delta is .2555 (74% probability this trade will be profitable)

Bull Put Spread
We recommend closing out this spread at $1,010 profit (see tables below)

Risk Analysis
Last week's Couch Potato Risk Analysis section stated"... the most immediate risk to our position is a continued market downtrend threatening the short put on our Bull Put spread." Obviously the situation has changed. As mentioned above the recommendation is to close out the put spread, therefore the only risk left for us to monitor is whether the recent market upsurge threatens the short call on our Bear Call spread.

For the past few weeks we mentioned that from a technical analysis standpoint the SPY has been trading within upper and lower bull channel trend lines. A few weeks ago the SPY was trading at the upper level of the bull channel and trending higher. Last week the SPY traded at the lower level and signaled a breakdown. This week we have another change in direction with the SPY closing at resistance of the top of the bull channel. 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 another pullback to the lower level? The best case scenario for us is a short-term market correction to minimize the risk our short position.

Exit Plan
Since we are closing out our short $100 strike put, the only risk we have to manage relates to the $109 strike price short call.

Anytime the market maker is willing to accept a limit price of less than .05 on one of our short strikes, buy back all the short contracts and sell the long positions on the same spread.

If the short call strike price is penetrated (closing price above the short call) AND the delta rises to .50 we will close out this spread (buy the short contracts, sell the long).

On the last day of the month, if rules 1 and 2 above have not been activated, let the Bear Call spread expire worthless and we keep the entire sold premium for any open contracts where the short strikes are not threatened.

Final comment
As mentioned above, the previous two weeks many analysts suggested that the market may have gotten ahead of itself with such a rapid ascent from the March low. Based on the tenuous economic recovery and the perception that the indexes were overbought, the market began a short-term decline to defined support levels. This week the market recovered and bullish sentiment has re-emerged with a positive spin on every bit of news (less bad is good).

This is why it is so important that we try to evaluate the upside and downside risk when setting up our Iron Condor, and have an exit plan regardless of market direction. After initiating a position we examine chart action to filter out noise to try to assess how the current market mood and direction might impact the risks that we have identified. Our goal is to produce consistent profitability. And as we constantly discuss in this publication our plan to achieve this goal is to follow a strategy that emulates how insurance companies operate – evaluate and manage risk, minimize losses, and generate sufficient premium to justify the risk. It should not be bothersome to us if the market vacillates up and down; our focus should be on how the current price impacts the risk to our open positions.

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.