Market Summary
The January 24th Couch Potato Market Summary commented on how uncertainty and confusion is impacting the market. The Fed Chairman U.S. Senate confirmation vote and the U.S. Treasury Secretary on the hot seat concerning what he did or didn't know about the AIG bailout; a political quagmire in Washington; the White House meddling in the affairs of the finance, bank, and auto industries. Plus the healthcare reform disaster and concerns about the quality of U.S. and foreign sovereign debt obligations. Finally the folks in Washington figured out that the lack of jobs is the top concern of working Americans. But between the partisan politics and seeming lack of practical business experience among our political leaders, they appear to be struggling to figure out how to generate job growth!

Our comments from a few weeks ago are still valid "... it was inevitable that higher volatility would return. Over the past few weeks more analysts have been suggesting that a correction is due. Now the question is how deep will be the pullback and is this the start of a market downturn, or is this a normal correction prior to stocks continuing to new highs... Maybe this is just a hiccup prior to the market settling down again, but if this is a period of prolonged higher volatility then we will just play what the market gives us." Due the recent higher volatility we need to keep a sharp eye on our put spreads and plan our next move to minimize potential losses and unacceptable risk.

SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday January 29th. This position has been open for 2 days:
The entire position is $320 in the black
SPY closed at $107.39
Both 30-day historical volatility and implied volatility numbers are still relatively low - BUT both numbers have risen from 52-week lows
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 EXTREMELY bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is EXTREMELY bearish (See SPY chart)

SPY Bear Call Spread
This spread is $670 in the black (see tables below)
Our $114 strike price short call delta is .0893 (91% probability this position will be profitable)

SPY Bull Put Spread
This spread is $350 in the red (see tables below)
Our $104 strike price short put delta is .2847 (71% probability this position will be profitable)

SPY Risk Analysis
At this point the path of least resistance for stock prices is down. The S&P has dropped down below most of the support levels that were identified when the market was headed up. From the technical analysis perspective when support is broken it then converts to resistance. And as displayed in the chart above, the SPY suddenly has a plethora of overhead resistance to overcome to just get back to where it was a few weeks ago.

The hope for the hard-core bull proponents is the fact that most oscillators and momentum indicators (Relative Strength Indicator, MACD, etc) are extremely oversold, more so than they were at the bear market bottom last year. And you can make the case that the current market response is simply a normal pull-back that occurs during long-turn bull runs. Plus most earning reports have exceeded analyst expectations and 4th Quarter growth was impressive.

Until the market identifies firm support levels during the current downtrend, we must assume the $104 strike short put will remain at risk. There are still three weeks until February option expiration and as we have witnessed the past 10 days, momentum can change suddenly and without obvious warning. However, based on what we see (not what we want) the prudent course is to be prepared to take action if stock prices continue to slide.

DIA Position Update
Listed below is the status of our DIA Iron Condor trade as of Friday January 29th. This position has been open for 12 days:
The entire position is $500 in the red
DIA closed at $100.55
Both 30-day historical volatility and implied volatility numbers are still relatively low - BUT both numbers have risen from 52-week lows
DIA is priced BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading BELOW its 20-day Bollinger Band SMA, and 50-day simple moving average (see DIA chart)
DIA is still well ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is EXTREMELY bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is EXTREMELY bearish (See DIA chart)

DIA Bear Call Spread
The January 24th Couch Potato recommended closing out the initial call spread for an approx. $810 profit and following up with a TRADE ADJUSTMENT to roll the call spread to lower strike prices (see tables below)

The Bear Call adjustment is $800 in the black (see tables below)
Our $106 strike price short call delta is .1400 (86% probability this position will be profitable)

DIA Bull Put Spread
The January 24th Couch Potato recommended closing out the initial put spread for an approx. $1,740 loss and following up with a TRADE ADJUSTMENT to roll the put spread to lower strike prices (see tables below)

The Bull Put adjustment is $370 in the red (see tables below)
Our $99 strike price short put delta is .3462 (65% probability this position will be profitable)

DIA Risk Analysis
The DIA risk scenario is pretty much the same as described above in the SPY risk analysis section. DIA has broken below support (which is now resistance) and momentum indicators are extremely oversold and the short-term trend is down. What differs from the situation with our SPY trade is that the stock prices plunged immediately after the DIA trade. Therefore, we had to do trade adjustments to react to the market momentum change and reduce our exposure. The obvious trade risk is that downward price pressure continues and threatens the adjusted $99 short put. If we need to get out of the current put spread we will probably look to minimize downside losses by holding off on further Bull Put positions until we get a clear sign of market bottom!

Exit Plan
The rules for exiting both Iron Condors (SPY and DIA) are:

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 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 the next trade!

On option expiration day, if rules 1 and 2 above have not been activated, let the spread contracts expire worthless and we keep the entire sold premium for any open contracts where the short strikes are not threatened.

Final comment
Market volatility has increased over the past few weeks, but volatility is still relatively low in reference to the 52-week range. However, market price support break-downs generally are considered to be more violent and erratic compared to when stock prices break above resistance; therefore, volatility increases and as discussed in the past, higher volatility is not the ideal market environment for market neutral strategies similar to the Iron Condor. With the understanding that down-side price breakdowns expose more inherent risk to our Iron Condors we will have a tight leash on the Bull Put spreads. If the market becomes agitated we must respect the circumstances and honor our trading objective by avoiding or at least limiting losses.

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.