Exit interviews after Tuesdays elections indicate voters are trying to send a message to the White House and Congress. The message appears to be that we are very upset and disappointed about the job situation and the poor economy. People want logical solutions instead of partisan fighting or ideological spats, which ever party is in charge will get the boot if voters don't believe they are paying attention.
This week the message came from New Jersey, Virginia and upstate New York, where the angry populace favored candidates more focused on jobs and competent-but-restrained government. It was reported that U.S. Senator Orrin G. Hatch (R-Utah) said. "This is about a Washington government that has got to pay a little more attention, a little more concern with the average person." And U.S. Senator Ben Nelson (D-Neb.) stated that "incumbents of every stripe had better take notice. Americans will vote for change if they feel their representatives aren't working to create jobs, improve the economy and run the government efficiently."
If in fact, Tuesday's elections were a "referendum on the economy," the question is whether our leaders in Washington "get it"? Did the White House and Congress not realize that following the last two recessions in 1991 and 2001 we had jobless recoveries? After mortgaging our children's futures to enact stimulus plans and bailouts that no one can say for sure are working, our leaders in Washington are just now beginning to discuss job creation legislation. And of course the debate thus far has been partisan â€“ public works programs versus business tax incentives. It appears that at this point in the economic recovery, the lack of jobs is what is putting a lid on the ability of the stock market to advance.
Listed below is the status of our SPY Iron Condor trade as of Friday November 6th. This position has been open for 18 days:
The entire position gained $1,490 this week - to $1,330 in the black
SPY closed at $107.13
30-day historical volatility and implied volatility have stabilized and are no longer heading up
SPY price has moved ABOVE its current 14-day EMA (see SPY chart down below)
SPY is now trading ABOVE its 20-day Bollinger Band SMA, and 50-day simple moving average (see SPY chart)
SPY is still well ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) has turned back to neutral (See Spy chart)
Moving Average Convergence/Divergence (MACD) is still bearish, but beginning to turn up (See Spy chart)
Bear Call Spread
The November 1st Couch Potato recommended closing out this entire call spread for an approx. $940 profit (see tables below) . The best case scenario for us would have been for the market to surge immediately after closing out the call spread. With approximately three weeks until the November option expiration we would have considering opening another SPY Bear Call spread IF we identified a trade that complied with our ordering rules - 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). Unfortunately, this opportunity has not presented itself and an important part of being a successful trader knowing when NOT to trade.
Bull Put Spread
This spread gained $1,490 this week - to $390 in the black (see tables below)
The $102 strike price short put delta is -.1550 (84% probability this trade will be profitable)
Since we closed out the short $114 strike call, the only risk we have to manage is the $102 strike price sold put. The risk associated with the sold put will be evaluated and resolved based on the Exit Plan.
For the past month or so we have noted that from a technical analysis standpoint the SPY has been trading within upper and lower bull channel trend lines. Last week the SPY signaled a breakdown below the lower level. However the support level held and SPY has moved towards the middle of the bull channel. In this situation, the obvious question is whether the SPY index will break through the top of the channel and go higher, or will there be another pullback to the lower level (threatening our short put)? The best case scenario for us is a market surge to minimize the risk to our short position.
As indicated in the November 1st Couch Potato, 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 may be able to 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. 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. As mentioned above we recommend closing the Bear Call spread. The Bull Put spread will be closed out as a separate order following the Exit Rules described above.
From a technical perspective our SPY ETF index has remained mid-term bullish since the pattern of higher lows is still in force. Last weeks pullback dropped the SPY to the 103 level. The October lows are around 102 and on the upside we are recognizing resistance at the recent highs near 110. And more importantly for us is the fact that volatility has stabilized. In past Couch Potato commentary we have noted how market neutral strategies similar to our Iron Condor typically perform better during more "orderly" market advances or declines. Around last year at this time the stock market started to collapse, which made profiting from market neutral option trading techniques somewhat challenging. And of course, after the market bottomed this past March, stocks skyrocketed to the upside, and call credit spreads required a little more effort to manage. For the past few months the good looking woman (the stock market) has been very cooperative with our Iron Condor, the ideal scenario for us is for this cooperation to last a while longer.
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.