Market Summary
The February 28th Couch Potato Market Summary mentioned "... For approximately the last five months the pattern is stocks making a move (up or down), then basically trade 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..." A few weeks ago the bears where in charge, now the bulls are calling the shots. Stocks had a big week, but the market is overbought and the S&P ended higher six consecutive days. The normal pattern is for prices to pullback from the overbought conditions – this is the ideal scenario for us to relieve the pressure on our short calls. But similar to what happened at the end of last summer; an overbought rally can continue indefinitely, we need to see how this plays out.

SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday March 5th. This position has been open for 4 days:
The entire position is $360 in the red
SPY closed at $114.25
30-day historical volatility and implied volatility are extremely low - implied volatility is at its' 52-week low which is considered bullish
SPY is priced ABOVE its' current 14-day EMA (see SPY chart down below)
SPY is trading ABOVE 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 bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is EXTREMELY bullish (See SPY chart)

SPY Bear Call Spread
This spread is $960 in the red (see tables below)
Our $115 strike price short call delta is .3898 (61% probability this position will be profitable)

SPY Bull Put Spread
This spread is $600 in the black (see tables below)
Our $107 strike price short call delta is .1177 (88% probability this position will be profitable)

SPY Risk Analysis
The S&P has risen above most of the resistance levels that were identified when the market was headed down. From the technical analysis perspective when resistance is broken it then converts to support.

The January 31st Couch Potato Risk Analysis mentioned "...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..." . The market behaved as advertised and stocks rallied off the oversold conditions. Now stocks are somewhat overbought and the normal response is a market pullback, especially considering the S&P ended higher six consecutive days.

Until the market identifies a firm resistance level during the current uptrend, we must assume the $115 strike short call will remain at risk. There are over three weeks until March Quarterly options expire and as we have witnessed the past six weeks, momentum can change suddenly and without obvious warning. However, we need to trade what we see (not what we want) and be prepared to make a move take if the stocks continue to rise.

MDY Position Update
Listed below is the status of our MDY Iron Condor trade as of Friday March 5th. This position has been open for 13 days:
The entire position is $1,550 in the red
MDY closed at $139.99
30-day historical volatility and implied volatility are extremely low - implied volatility is at its' 52-week low 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 still well ABOVE its 200-day simple moving average (see MDY chart)
Relative Strength Indicator (RSI) is EXTREMELY bullish (See MDY chart)
Moving Average Convergence/Divergence (MACD) is EXTREMELY bullish (See MDY chart)

MDY Bear Call Spread
This spread is $2,450 in the red (see tables below)
Our $139 strike price short call delta is .5497 (45% probability this position will be profitable)

MDY Bull Put Spread
This spread is $900 in the black (see tables below)
Our $127 strike price short call delta is .03 (97% probability this position will be profitable)

MDY Risk Analysis
The MDY risk scenario is pretty much the same as described above in the SPY risk analysis section. The short-term trend is up, MDY has risen above resistance (which now is now support) and momentum indicators are extremely overbought. The obvious risk is that upward price pressure continues and we need to roll out of our $139 short call.

Exit Plan
The rules for exiting both Iron Condor positions (SPY and MDY) 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 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 initiated both Iron Condor positions (SPY and MDY) as separate orders with four legs each. Exiting these positions prior to expiration we will probably “leg out” 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.

Final comment
Recent Couch Potato commentary discussed how stock price corrections are more violent and difficult to manage versus price advances. Now the situation has changed, instead of preparing to protect our put spreads from price breakdowns, we need to monitor the call spreads due to higher prices. Fortunately, market volatility has subsided to 52-week lows and breaks above resistance generally are more orderly and are easier to recover from compared to breakdowns.

Gregory Clay

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.