It is clear that investors smell fear in the market. If it true that fear and greed drive stock prices, the overwhelming sentiment is that prices are going lower. And the perception is that the "talking heads" in the media are predominately short-term market bearish. There is the concern about an economic slowdown in China, the European debt crisis, crushing city and state budget deficits in the U.S., plus partisan bickering in Washington over jobs, healthcare, etc. Stock market fundamentals suggest a down market and most of the standard stock chart technical indicators paint a bearish picture.
We don't yet know whether this negative mood will further depress stock prices, but one truism is that most market participants are usually wrong about market direction! After four straight losing weeks stocks finally edged higher and stock chart momentum indicators and oscillators are turning from bearish to neutral. Even some of the talking heads are starting to murmur about maybe this correction has bottomed. There is considerable overhead pressure on stock prices and the short-term trend is definitely down, but we should not be surprised if the market decides to do something different from what most people expect.
SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday February 12th. This position has been open for 16 days:
The entire position is approx. $1,660 in the black
SPY closed at $108.04
Implied volatility has pulled back from the accelerated pace of a week ago
SPY is priced just 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 turning from bearish to neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish but starting to turn up (See SPY chart)
SPY Bear Call Spread
The February 4th Couch Potato recommended closing out the entire call spread for an approx. $810 profit
SPY Bull Put Spread
This spread is approx. $850 in the black (see tables below)
Our $104 strike price short call delta is -.1750 (82% 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. February option contracts expire on Friday, therefore the numero uno priority is to protect our gains and avoid a potential last minute disaster. As indicated in the SPY chart above, the various moving averages are providing considerable overhead resistance and the short-term trend is definitely down! 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 12th. This position has been open for 26 days:
The entire position is approx. $1,040 in the black
DIA closed at $101.27
The 30-day historical volatility and implied volatility number have stabilized after accelerating the past few weeks
DIA is priced just 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) has turned from bearish to neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish but starting to turn up (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 approx. $1,110 in the black (see tables below)
Our $99 strike price short call delta is .2850 (71% 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. As mentioned above, at this point the top priority is to close out option expiration week relatively unscathed. The option month began with a bloodbath, but we recovered and are poised to have a respectable gain; there is a tight leash on the put spread to avoid ending the month how it started. The risk associated with the sold put will be evaluated and resolved based on the 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.
If the delta associated with the short put rises to .50 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.
At this point, the best-case scenario for us is a market advance or at the very least we need stocks to stay above current support levels. Volatility is higher, and considering this is option expiration week, anything can happen. If the market is kind to us and we get a repeat of last week, then we will have converted a potentially disastrous month into decent gains! Experienced option traders know that even though we are set up to exit the expiration month with a nice gain, sometimes it doesn't take much for a trade to suddenly go bad. Considering the negative sentiment that is already permeating the market we will not hesitate to leave money on the table to lock in gains if it appears the risk is not worth it. Our focus is to generate cash from managing risk, not betting on market direction.
For one low price the 2009 EOY package includes a full year of Option Investor, Premier Investor, Option Writer, LEAPS Trader and Couch Potato Trader. You get daily market commentary and plays every week in nearly every possible strategy. Plus you get two Option Expiration Calendar Mouse Pads with the "NEW" option symbol format for 2010. You get three DVDs with 254 minutes of option education. You get all of this for the unbelievable low price of $1.36 per day. If you have not signed up take two minutes and do it now!
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.