Though the market has been reaching new 52 week highs, our comment from last week is still valid "...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 25th. This position has been open for 15 days:
The entire position is $860 in the black
SPY closed at $112.48
Both 30-day historical volatility and implied volatility numbers are low - both volatility numbers are at 52 week lows, which is bullish
SPY is priced ABOVE current 14-day EMA (see SPY chart down below)
SPY is trading 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) has turned bullish (See Spy chart)
Moving Average Convergence/Divergence (MACD) is neutral (See Spy chart)
SPY Bear Call Spread
This spread is basically at breakeven (see tables below)
$115 strike price short call delta is .2752 (72% probability this position will be profitable)
SPY Bull Put Spread
This spread is $840 in the black (see tables below)
$104 strike price short put delta is -.0845 (92% probability this position will be profitable)
SPY Risk Analysis
The SPY finally breached the $112 50% Fibonacci retracement level â€“ though the advance occurred on lower than normal volume, it still counts as a breach. The most probable risk to our SPY Iron Condor is that the so-called Santa Claus rally continues and as the SPY price rises it might threaten our $115 short call.
DIA Position Update
Listed below is the status of our DIA Iron Condor trade as of Friday December 25th. This position has been open for 15 days:
The entire position is $1,065 in the black
DIA closed at $105.00
Both 30-day historical volatility and implied volatility numbers are low - both volatility numbers are near 52 week lows, which is bullish
DIA is priced ABOVE its 14-day EMA (see DIA chart down below)
DIA is trading ABOVE 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) has turned bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is neutral (See DIA chart)
DIA Bear Call Spread
This spread is $488 in the black (see tables below)
$108 strike price short call delta is .1740 (83% probability this position will be profitable)
DIA Bull Put Spread
This spread is $578 in the black (see tables below)
$98 strike price short put delta is -.0851 (91% probability this position will be profitable)
The DOW Jones Industrial Average has been reaching new highs, albeit on lower volume. If this trend continues the most probable risk to our DIA Iron Condor is the price encroaching upon our $108 short call.
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 â€œleg outâ€ 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.
Recent Couch Potato commentary mentioned how the current stock market volatility has been relatively subdued, which is the optimum environment to trade market neutral strategies similar to the Iron Condor. Though the DJA and S&P have been reaching new 52 week highs, the advances have been on low volume and volatility levels are actually at 52 week lows. For most of the year market volatility favored directional trading strategies and it was more of a challenge to profit from market neutral trades. Recently the situation has reversed; it is easier to make money with Iron Condors and directional traders have to work a little harder to find a profitable trade. Our hope is that the market continues to be kind to us by maintaining the status quo for a while longer!
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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.