The March 21st Couch Potato Summary mentioned "...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..."
Well, stocks may be running out steam â€“ on Thursday and Friday, stocks gave up large intraday gains and ended flat. The battle between the bulls and bears is now getting interesting. The short-term trend is still up, but stocks needed a breather after an unimpeded ascent off February lows. The best case scenario for our iron condors is for the bears to get their way â€“ this will relieve the pressure on the call spreads and get us back on the profitability path.
SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday March 26th. This position has been open for 25 days:
The entire position is approx. $740 in the red
SPY closed at $116.58
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 still bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is losing momentum and turning neutral (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. $760 in the black (see tables below)
Our $118 strike price short call delta is .2302 (77% probability this spread 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. $590 in the black (see tables below)
Our $114 strike price short put delta is .1233 (88% probability this spread will be profitable)
SPY Risk Analysis
The SPY price actually rose above our short call strike on Thursday afternoon, but by market close it gave back all the gains and ended with a small loss. Friday was a repeat of Thursday with the SPY forfeiting gains from earlier in the day and closing with a small loss. Our SPY contracts expire on Wednesday we need downward pressure to remain on stocks a few more days to minimize the risk to our short call. The fly in the ointment might be Tuesday's consumer confidence report, if the bulls like what they hear stocks could easily go higher.
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 .50 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.
DIA Position Update
Listed below is the status of our DIA Iron Condor trade as of Friday March 26th. This position has been open for 4 days:
The entire position is approx. at break-even
DIA closed at $108.43
30-day historical volatility and implied volatility are extremely low - both volatility numbers are near 52 week lows, which is considered bullish
DIA is priced ABOVE its' current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE 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 EXTREMELY bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bullish (See DIA chart)
DIA Bear Call Spread
This spread is approx. $270 in the red (see tables below)
$110 strike price short call delta is .1946 (81% probability this position will be profitable)
DIA Bull Put Spread
This spread is approx. $320 in the black (see tables below)
$105 strike price short call delta is .1882 (81% probability this position will be profitable)
DIA Risk Analysis
Similar to the SPY Risk Analysis above, the DIA basically closed flat on Thursday and Friday after giving back decent intraday gains. The Dow Jones Industrial Average ended higher 16 out of the last 21 days, therefore a pause was inevitable. The short-term trend is still bullish, and unless there is a pullback our short call will be at risk.
As with initiating the trade, the decision process for exiting our DIA Iron Condor position will be simple:
Anytime the market maker is willing to accept a limit price of less than .06 on one of our short strikes, buy back all the short contracts and sell the long positions on the same spread.
If one of our short strikes is penetrated (closing price above our short call or below the short put) AND after market close, if the delta associated with one of the short strikes is .65 or higher, 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. 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 opened the DIA Iron Condor as a separate order with four legs each. 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 DIA Iron Condor is dependent on following our DIA Exit Rules described above.
Recently we have discussed how the past few months have been more challenging to traders specializing in market neutral strategies similar to the iron condor. We have tweaked our trading plan to accommodate the current market risk, but the key for us is patience. Impatience tends to force traders to enter or exit trades prematurely, or get into trades that don't comply with their risk profile. If we really believe in our trading system, then it is best to exercise discipline and patience to give it a chance to work. If we are truly getting unexpected results given the market environment, then we should re-evaluate the trading plan. But as long as we exercise proper risk management, discipline and patience, we should expect to do okay, regardless of market direction.
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.