Market Summary
For the purposes of our Couch Potato trade selections, the market cooperated and we got what we wanted with subdued trading the past few weeks as the so-called junior traders manned the trading desks. We suggested that as long as volatility levels remained near 52-week lows that we could expect our Iron Condor plays to increase in value, this is exactly what happened. Now the key is what will be the mood of the big dogs (senior traders) when they return to work next week. Are they anxious to the start another bull leg or is a correction in order?

All of our Iron Condor credit spreads are profitable and are within our acceptable risk tolerance. A few months ago there appeared to be quite a few analyst predicting that the market should make a dash towards all-time highs over the next few months. However, over the past few weeks the mood has soured a bit with more people suggesting some sort of correction could occur either immediately, or after stocks advance a bit further? For our Couch Potato plays we are primarily concerned about the next two weeks - since our options expire in only the second week of January we should be prepared to do 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 January 1st. This position has been open for 23 days:
The entire position is $1,440 in the black
SPY closed at $111.44
Both 30-day historical volatility and implied volatility numbers are low - 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 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 $610 in the black (see tables below)
Our $115 strike price short call delta is .1799 (82% probability this position will be profitable)

SPY Bull Put Spread
This spread is $830 in the black (see tables below)
Our $104 strike price short put delta is -.0900 (91% probability this position will be profitable)

SPY Risk Analysis
The SPY was not able to sustain a firm penetration above the $112 50% Fibonacci retracement level and on the last trading day of the year we had minor pullback. The path of least resistance is up and the SPY is still trading near the upper trend line of the bull channel that has been in place since the beginning of October. Until there is a correction the most probable risk to our SPY Iron Condor is that the market resumes its advance 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 January 1st. This position has been open for 23 days:
The entire position is $1,252 in the black
DIA closed at $104.07
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 at its 14-day EMA (see DIA chart down below)
DIA is basically trading 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) is neutral (See DIA chart)

DIA Bear Call Spread
This spread is $698 in the black (see tables below)
Our $108 strike price short call delta is .1026 (89% probability this position will be profitable)

DIA Bull Put Spread
This spread is $555 in the black (see tables below)
Our $98 strike price short put delta is -.0986 (90% probability this position will be profitable)

DIA Risk Analysis
The DOW Jones Industrial Average pulled back a bit from recent 52-week highs, but this is not considered a correction or confirmation of a downtrend. Until we get a definitive pullback the market direction is still bullish and if this trend continues the most probable risk to our DIA Iron Condor is the price encroaching upon our $108 short call.

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. If one of our short strikes has been violated and there is no price reversal, we cut our losses and start planning our February trades.

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
The December 27th Couch Potato made a comment "... For most of the year market volatility favored directional trading strategies and it was a 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!" Traders will return to this work this week and we can expect increased trading volume. The obvious best-case scenario for us is another week similar to past few weeks and should be able to close-out our January options with nice gains!

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.