Market Summary
There appears to be credence to the perception that traders are content to lock in profits for the year and not risk losses as the major indexes are up over 20% for the year (including up over 60% from the March lows). We expect subdued trading volume over the next two weeks as many traders take holiday vacation. If our prognosis is accurate this bodes well for our Iron Condor positions. Volatility levels are already near 52 week lows and another two weeks of the same should add to our gains. On the flip-side, volatility could increase because fewer participants make it easier to move the market. Also traders could return from vacation raring to go and push the market higher (or lower). Since our options expire in only the second week of January we would have to plan on doing a trade adjustment earlier than normal if one of our trades goes against us.

SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday December 18th. This position has been open for 8 days:
The entire position is $760 in the black
SPY closed at $110.21
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 at its current 14-day EMA (see SPY chart down below)
SPY is trading slightly ABOVE its 20-day Bollinger Band SMA (see SPY chart)
SPY is trading ABOVE its 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)

SPY Bear Call Spread
This spread is $480 in the black (see tables below)
$115 strike price short call delta is .1718 (83% probability this position will be profitable)

SPY Bull Put Spread
This spread is $280 in the black (see tables below)
$104 strike price short put delta is -.1827 (82% probability this position will be profitable)

SPY Risk Analysis
The SPY risk profile has not really changed since the beginning of November. As mentioned several times in recent weeks, SPY is having difficulty making a convincing break through the $111 level. If this index advances past $111, the 50% Fibonacci retracement level from the March 2009 low to the index all-time high will probably provide technical overhead resistance at $112. If there is a market correction, the most obvious SPY support level should be the 50-day SMA which is at approx. $108 (See Spy chart above) .

DIA Position Update
Listed below is the status of our DIA Iron Condor trade as of Friday December 18th. This position has been open for 8 days:
The entire position is $675 in the black
DIA closed at $103.14
Both 30-day historical volatility and implied volatility numbers are stable both volatility numbers are near 52 week lows, which is bullish
DIA is priced just BELOW its 14-day EMA (see DIA chart down below)
DIA is trading right at its 20-day Bollinger Band SMA (see DIA chart)
DIA is trading ABOVE its 50-day simple moving average (see DIA chart)
DIA is well ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) has turned bearish (See DIA chart)

DIA Bear Call Spread
This spread is $570 in the black (see tables below)
$108 strike price short call delta is .1200 (88% probability this position will be profitable)

DIA Bull Put Spread
This spread is $105 in the black (see tables below)
$98 strike price short put delta is -.1864 (81% probability this position will be profitable)

Risk Analysis
Since the beginning of October, DIA has been contained within upper and lower bull channel trend lines. DIA has not been able to break through overhead resistance and appears to be trying to turn down. If there is a market correction, the most obvious DIA support level should be around the $101 which happens to converge with both the 50-day SMA and lower Bollinger Band level (See DIA chart above) , if this happens the $98 short put will be at risk.

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 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 .65 we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price. 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 opened both Iron Condor positions (SPY and DIA) as separate orders with four legs each. Exiting these positions prior to expiration we will probably “leg out” of each 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
Regular readers of the Couch Potato have probably noticed that in addition to the SPY Iron Condor that we normally trade, we also opened a DIA ETF Iron Condor position. Our normal process is to constantly evaluate a series of index ETF's (e.g. SPY, DIA, XLE, IWM, QQQQ, MDY) to determine which ETF provides the most optimum risk/reward profile to trade an Iron Condor. We have no particular infatuation with the SPY, except that for most of the year it has best fit our risk profile (compared to the other indexes). In fact there are traders that earn a living by primarily focusing on trading the SPY.

By definition an Iron Condor trade is a hedged transaction because there are offsetting bullish and bearish positions – this mitigates the need to initiate another trade to protect against losses. Some traders choose to diversify by opening an equity index ETF Iron Condor and also trading non-equity ETF Condor (e.g. XLE, TLT). As mentioned above we regularly analyze a series of ETF's, and in the Couch Potato we publish what we believe is the optimum trading opportunity. However, some readers have requested other Iron Condor plays in addition the SPY. If traders feel compelled to open an Iron Condor position besides the SPY, the other ETF we are trading is DIA. PLEASE NOTE – that generally these are actual trades (i.e. we have skin in the game) and are not simulated trades.

Gregory Clay

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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.