SPY ETF Trade Setup
Also we are opening February expiration SPY Iron Condor.
SPY closed at $109.31 on Tuesday (25 days to expiration)
SPY is priced BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW 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) is bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)
30 day Historical Volatility is 14.11%, Implied Volatility is higher at 21.84% - both volatility numbers have risen from 52-week lows
Upper range standard deviation is .84162, the lower range is -.84162
Use the number of days to expiration, volatility number and the standard deviation to calculate the 80% statistical probability for the option price to close within our short strikes at expiration.
We want the SPY Bear Call spread short strike to exceed defined resistance levels :
$112 calculated based on previous intraday highs and technical resistance levels
$114 equals the upper price level of our 80% statistical probability range
$116 is the upper level of the Bollinger Band â€“ Upper solid purple line in the SPY chart below
The Bull Put spread short strike price should be below defined support levels :
$109 calculated based on previous intraday lows and technical support levels
$104 equals the lower price level of our 80% statistical probability range
$109 is the lower Bollinger Band level â€“ Lower solid purple line in the SPY chart below
We want the SPY Iron Condor to generate a minimum .50 net credit on each leg AND we prefer that the short strikes fit our statistical probability profile (80% chance all the options will expire worthless and we get to keep most of the sold premium). The spread in tables below comply with our trading rules for initiating the February option expiration month SPY Iron Condor (based on Tuesday's closing prices). The recommendation is to submit a limit order to purchase/sell the option strikes prices below.
Premium Credit $1.05
Total Option Premium Received $2,100 (Excludes commissions and fees)
Maximum Risk $7,900
Margin Requirement $10,000
20 contracts traded on each leg (number of contracts can be increased or decreased based on risk tolerance and/or funds available to trade; this will impact Total Premium Received, Maximum Risk amount, and Margin Required)
As with initiating the trade, the decision process for exiting our Iron Condor positions will be simple:
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 are opening the SPY Iron Condor as separate order 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.
Regular Couch Potato subscribers noted that we initiated a DIA Iron Condor and delayed our standard SPY trade. The January 16th Couch Potato Final Comment section stated "... At this point in time, the market is telling us that the DIA trade is the best option considering the amount of premium we want to receive and the risk we are willing to take. But it is still relatively early in the trading month and we may yet have an opportunity to do another trade within the next week or so. We have a long three-day weekend and when traders return to work next week we take a few days to get "feel" for the market mood before deciding on doing another trade â€“ lets trade what we see, not how we think the market is supposed to perform!"
Obviously market momentum has changed in the past few weeks and oftentimes the best trade is NOT to trade. Our strategy should be to honor our trading rules (trade setup, exit rules, trade adjustments, etc.) and let the market tell us when to make a play. In the past we have discussed how our objective is not to attempt to predict what direction we think stock prices are headed (my OptionInvestor colleagues will provide insight on market direction and directional trading strategies). The goal for us is to emulate insurance companies by generating premium dollars by managing risk. If an insurer deems a risk to be unacceptable they will not do business. At this point we are putting the SPY in play because the market has signaled that the premium dollars justify the risk.
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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.