It is very interesting that the plethora of positive economic data released this past week had minimal impact on stocks, especially the surprising jobs report. If you look "under the hood" and review the intraday charts of the stock indexes, it appears that traders are selling into strength. Average volume has been declining all year (partly because retail investors have mostly been on the sidelines) and recently volume is highest during intraday pullbacks from recent highs. A lot of analysts believe that money managers are showing nice profits from the surge off the March lows and their priority at this point is to lock in profits. If this is true, then we should expect the current low volatility to last until year-end.
Listed below is the status of our SPY Iron Condor trade as of Friday, December 4th. This position has been open for 23 days:
The entire position gained $720 this week and is $1,750 in the black
SPY closed at $111.01
Both 30-day historical volatility and implied volatility numbers are stable both volatility numbers are near 52 week lows, which is bullish
SPY is priced above to its current 14-day EMA (see SPY chart down below)
SPY is trading ABOVE its 20-day Bollinger Band SMA, and 50-day simple moving average (see SPY chart)
SPY is well ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is neutral (See Spy chart)
Moving Average Convergence/Divergence (MACD) is neutral (See Spy chart)
Bear Call Spread
This spread is $860 in the black (see tables below)
$115 strike price short call delta is .1383 (86% probability this trade will be profitable)
Bull Put Spread
This spread is $890 in the black (see tables below)
$103 strike price short put delta is -.0716 (93% probability this trade will be profitable)
The analysis reported in the Couch Potato for the past several weeks is still valid. In summary, we discussed the difficulty with the SPY ETF getting past the $111 level AND technical resistance at the $112 Fibonacci 50% retracement level is immediately above. If there is a market correction, the most obvious SPY support level should be the 50-day SMA which is at approx. $108.
We have been discussing how since the beginning of October, the SPY has been trading within upper and lower bull channel trend lines. The market's recent advance has revised our risk in that the statistical probability of our short put being penetrated has decreased considerably; the probability associated with short call has not changed. So there is the considerable overhead resistance the SPY has to overcome prior to reaching our short call; on the downside, our short put is well below the 20-day and 50-day moving average support lines. With two weeks to go until the December option expiration date you can make a case either way for whether the short call or short put is more at risk.
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 may be able to 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 .50 we will look to close out this spread (buy the short contracts, sell the long).
We initiated the SPY Condor as one order with four legs. Exiting this position prior to expiration we will probably â€œleg outâ€ 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.
The November 22nd Couch Potato opined"... volatility levels have diminished; and next week is a short trading week because of the thanksgiving holiday and should be relatively quiet considering many professional traders are taking time off. When traders return to work the first week of December our Iron Condor should have increased in value due to time decay (theta) related to the short strikes..." Recent market behavior has been ideal for managing the risks associated with our SPY Iron Condor. We anticipated a slow Thanksgiving week and this past week was also relatively quiet. The base-case scenario for us is another week similar to the past two so that we can close our position early and lock in gains.
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.