Investors were schizophrenic this week about how to react to the financial news. One day stocks surged up, and then the next day they are down. A few days prices fluctuated wildly both up and down. When it all is said and done, stocks basically ended the week flat. Stocks closed Friday with modest gains for February, but the monthly gain was the best since November. The recent market behavior is beneficial to our Iron Condor trades and an important reason for our success. For approximately the last five months the pattern is stocks making a move (up or down), then basically trading range-bound until the next move. Continued confusion is the ideal scenario for us, as the bulls and bears continue to sort out who is going to be the boss; we will continue to profit from eroding premiums related to sold calls and puts.
MDY Position Update
Listed below is the status of our MDY Iron Condor trade as of Friday February 26th - This position has been open for 5 days:
The entire position is approx $920 in the black
MDY closed at $133.95
Historical volatility and implied volatility have stabilized near the lower level of their 52-week range â€“ which is considered bullish
MDY is priced ABOVE its current 14-day EMA (see MDY chart down below)
MDY is trading ABOVE its 20-day Bollinger Band SMA, and 50-day simple moving average (see MDY chart)
MDY is well ABOVE its 200-day simple moving average (see MDY chart)
Relative Strength Indicator (RSI) is basically neutral (See MDY chart)
Moving Average Convergence/Divergence (MACD) is bullish (See MDY chart)
MDY Bear Call Spread
This spread is $670 in the black (see tables below)
$139 strike price short call delta is .1518 (85% probability this position will be profitable)
MDY Bull Put Spread
This spread is $250 in the black (see tables below)
$127 strike price short put delta is -.1710 (83% probability this position will be profitable)
MDY Risk Analysis
The February 21st Couch Potato MDY Risk Analysis mentioned"...The question is whether this recovery has the legs to push prices higher or is this merely a dead-cat bounce? Until the market plays its hand and decides to go up, down, or trade range-bound â€“ you can make a case for either the short call or short put being more at risk..." This comment is still valid as MDY essentially ended the week where it began. We are still at an impasse between buyers attempting to bid up stocks and sellers unloading shares. Until the conflict between the bulls and bears is resolved we can't know for certain whether our risk exposure is to the upside or downside.
As with initiating the trade, the decision process for exiting our MDY Iron Condor position 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 initiating the MDY Condor as one order with four legs. Exiting this position prior to expiration we will probably â€œleg outâ€ of the 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 readers may be wondering what is up with our standard SPY and more recent DIA trade. A standard part of our work process is a daily evaluation of the major index ETF's to locate the next trade opportunity. For the March option expiration month, other than the MDY trade, no other potential ETF trade has complied with our trading plan. If we were to relax our ordering rules and do a SPY or DIA trade, it would be a higher risk situation, and the reward would not justify the risk. In the past we discussed how our focus is similar to how insurance companies operate - manage risk and minimize potential losses.
Sometimes the best trade is not to trade. I suspect most of us are familiar with legendary investor Warren Buffet's trading rules- Rule No. 1, don't lose money. Rule No 2, don't forget Rule No. 1!!! This concept is especially critical with market neutral strategies similar to the Iron Condor where one large loss could potentially wipe out months of gains. The point is that the reason we have been relatively successful with our Couch Potato trades is because the trading plan is working, therefore we should stick with it. If for whatever reason our trades are no longer profitable, then we will make the necessary modifications to the plan.
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.