It is too early to tell whether stocks are running out of steam. The market has been overbought for a few weeks and some prognosticators claim a price pull-back is inevitable. Eventually, stocks will blow off steam and revert back to the mean, but as mentioned previously, overbought rallies can continue indefinitely (e.g. last summer and fall). Last Friday's down day may or may not be the beginning of a short-term pullback. Friday was quadruple witching day and a negative day was not unexpected, plus it was only the second day in past few weeks the S&P futures ended down. Currently, the SPY price is equidistant from our iron condor short strikes and the best-case scenario is for the S&P to trade range-bound for the next 10 days.
SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday March 19th. This position has been open for 18 days:
The entire position is approx. $1,520 in the red
SPY closed at $115.97
30-day historical volatility and implied volatility are extremely low - historical volatility is at its' 52-week low which is considered very 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
The March 17th Couch Potato recommended closing out the initial call spread for an approx. $3,070 loss and following up with a TRADE ADJUSTMENT to roll up to a higher strike price call spread (see tables below)
The Bear Call adjustment is approx. $570 in the black (see tables below)
Our $118 strike price short call delta is .2292 (81% probability this position will be profitable)
SPY Bull Put Spread
The March 17th Couch Potato recommended closing out the initial put spread for an approx. $980 gain and following up with a TRADE ADJUSTMENT to roll up to a higher strike price put spread (see tables below) .
The Bull Put adjustment is approx. at break-even (see tables below)
Our $114 strike price short put delta is .2560 (74% probability this position will be profitable)
SPY Risk Analysis
The March17th Couch Potato SPY Risk Analysis stated "...The indicators suggest $117 should be short-term resistance, however until the market proves otherwise we must assume the current uptrend will continue and the $118 strike short call will be at risk..." this assessment is still valid as the path of least resistance is upward.
The rules for exiting the SPY credit spreads are:
Anytime the market maker is willing to accept a limit price of less than .05 on one of the short strikes, buy back all the short contracts and sell the long positions on the same spread.
After market close, if the delta associated with one of the short strikes is .55 or higher we will look to close out this spread (buy the short contracts, sell the long).
March 31st is the expiration day for the SPY options, and if rules 1 and 2 above have not been activated, let the option contracts expire worthless and we keep the entire sold premium for any open contracts where the short strikes are not threatened.
Some folks are having "fond" memories of last winter â€“ the stock market crashed, and then spring arrived and prices took off from the bear market lows. That episode brought mucho heartache and pain to a lot of investors. Traders specializing in market neutral strategies similar to the iron condor had to be especially sharp to do well last winter and spring. The past few months have required market neutral traders to do more trade adjustments than usual. Until stocks indicate otherwise, it is smart to assume the current trend will continue. We will tweak our trading plan to accommodate the additional risk in the current market environment.
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.