Market Summary
Past Couch Potato articles have suggested that the simplest way to understand the emotions and mood of the stock market is look at it the same way as one would an attractive woman. They can pretty much get away with doing what they want, whenever they want, mostly when you least expect. Okay, for those of us who can't or don't appreciate that particular view, there was an article published this past week that offered a more cerebral explanation. A comment in the article referred to the market advance last year as "the junk stock rally" because the most heavily shorted companies in the S&P500 performed the best. It stated "the 50 companies in the Standard & Poor's 500 with the highest concentration of shares held by short sellers rose 59.6 percent last year versus 23.5 percent for the entire index". The article explained how a cycle of market advances forced the shorts to limit losses by rapidly unwinding their positions and this helped push the market higher and higher. Also, short-sellers have been frustrated by the fed easy money policy which has driven investors from low-yielding market funds into stocks.

The aforementioned article suggested that shorts are vulnerable right now, but it also said that very often short-sellers are right-on with analyzing companies' problems; it is just the timing of their bets that causes shorts to lose money. So the question before us right now is, are the shorts getting ready to party like its 1999 (or at least like the winter of 2008)? Or are they in for more heartache and pain (with the traders interpreting any news as good news and pushing stocks higher)? Right now it is easy to make the case to "look out below", but we have been faked out before and again, the question is whether the current correction is bottoming out, or is this pause before heading lower?

SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday February 5th. This position has been open for 9 days:
The entire position is $440 in the black
SPY closed at $106.66
Both 30-day historical volatility and implied volatility numbers are accelerating higher
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 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 EXTREMELY bearish (See SPY chart)

SPY Bear Call Spread
The February 4th Couch Potato recommended closing out the entire call spread for an approx. $810 profit (see tables below)

SPY Bull Put Spread
This spread is $370 in the red (see tables below)
Our $104 strike price short call delta is -.3039 (70% probability this position will be profitable)

SPY Risk Analysis
Since we closed out the short $114 strike call, the only risk we have to manage is the $104 strike price sold put. The risk associated with the sold put will be evaluated and resolved based on the Exit Plan.

DIA Position Update
Listed below is the status of our DIA Iron Condor trade as of Friday February 5th. This position has been open for 19 days:
The entire position is $450 in the red
DIA closed at $100.16
Both 30-day historical volatility and implied volatility numbers are accelerating higher
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 bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is 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 February 4th Couch Potato recommended closing out the adjusted call spread for an approx. $860 profit (see tables below)

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 $380 in the red (see tables below)
Our $99 strike price short call delta is .3927 (61% probability this position will be profitable)

DIA Risk Analysis
Since we closed out both the initial call spread and the adjustment, the only risk we have to manage is the $99 strike price sold put. The risk associated with the sold put will be evaluated and resolved based on the Exit Plan.

Exit Plan
The rules for exiting both Bull Put spread positions (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 the delta associated with the short put rises to .55 we will look to close out this spread (buy the short contracts, sell the long).

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

We initiated both Iron Condor positions (SPY and DIA) as separate orders with four legs each. As mentioned above we already closed out all the Bear Call spread contracts. The Bull Put spreads will be closed out as a separate order following the Exit Rules described above.

Final comment
The January 29th Couch Potato stated"... 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... based on what we see (not what we want) the prudent course is to be prepared to take if the stocks continue to slide... February option expiration and as we have witnessed the past 10 days, momentum can change suddenly and without obvious warning..."These comments are still very valid. One has to simply think back to this time last year as a reminder of how much damage the market can inflict upon the unprepared souls who don't protect themselves!

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.