Market Summary
Many of the "talking heads" are obsessed with the Dow Jones Industrial Average march through the 10,000 resistance level. But technical analyst may be more interested with the S&P's advance towards the 50% Fibonacci retracement level from the March 2009 low to the index all-time high - 1,121 is the mid-point to the October 2007 high. The 50% level is considered a favorite technical indicator among some traders because historically the market tends to advance higher after getting past his point!

Position Update
Listed below is the status of our SPY Iron Condor trade as of Wednesday October 14th. This position has been open for 19 days:
The entire position lost $110 this week - to $1,310 in the black
SPY closed at $109.31
30-day historical volatility is stable, implied volatility is decreasing which is bullish
SPY is trading ABOVE its 14-day EMA (see SPY chart down below)
SPY is also trading ABOVE its 20-day Bollinger Band SMA (see SPY chart)
SPY has surged well ABOVE its 50-day SMA (see SPY chart)
SPY is considerably ABOVE its 200-day SMA average (see SPY chart)
Relative Strength Indicator (RSI) is bullish (see SPY chart)
Moving Average Convergence/Divergence (MACD) is bullish (see SPY chart)

Bear Call Spread
We recommend doing an adjusting trade to convert the opening trade from an unrealized loss to a $300 unrealized gain. The recommendation is to buy back our $109 short strikes and sell $110 calls for the same expiration date (Friday). (see TRADE ADJUSTMENT table below).

Bull Put Spread
The October 10th Couch Potato recommended closing out this spread at $1,010 profit (see tables below)

Risk Analysis
The October 10th Couch Potato Risk Analysis section mentioned "... therefore the only risk left for us to monitor is whether the recent market upsurge threatens the short call on our Bear Call spread." The risk became real, but fortunately for us there is sufficient time to adjust the call spread to minimize potential losses (see Bear Call Spread section above).

The October 10th Couch Potato Risk Analysis section also stated "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 to our short position." The desired "best case scenario" did not come to fruition and as mentioned above, we recommend playing the hand the market dealt us by rolling our short call to a higher strike price. Obviously, after the recommend trade adjustment there is the risk of the SPY continuing to surge and our new position might be threatened. October options expire on Friday and we recommend following the Exit Plan below!

Exit Plan
As mentioned in the Bear Call Spread section above, we advise buying back all the $109 short calls and selling $110 strike calls with the same expiration date. Anytime prior to Friday market close (October option expiration date) if the $110 short call strike price is penetrated ( bid price above the short call) buy back all the short contracts and sell the long positions on the same spread. OR, if the delta rises above .50, close out this spread (buy the short contracts, sell the long).

At this point the NUMERO UNO objective is to not to take a chance of ending the week with a market close above the $110 call strike price. IF on market expiration day, SPY closes at $110.01, you will probably be assigned after the market close – WHEN IN DOUBT GET OUT!

If the SPY price stabilizes and the call spread position is not closed out as advised above, exit the trade anyway prior to the market close on Friday if the market maker is willing to accept a nominal price (e.g. .05). Depending Friday market activity , at some point prior to market close, buying backing back inexpensive short options is cheap insurance to avoid last minute surprises.

Final comment
The bulls are back and regular subscribers might relate this week's market activity to the August option expiration week when end-of-week volatility created problems for our Iron Condor. Some people believe timing is everything and fortunately for us, unlike August, this time we have a few days to make adjustments to minimize potential losses. Again, it is critical to have a trade planned for however the market reacts.

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.