Market Summary
Investors seemed somewhat relieved that President Barack Obama's comments about financial reform did not contain any surprises. Stock prices had started pulling back, but they recovered after the President's news conference. It seems as if everyone is expecting a correction from consistently overbought conditions. We seem to be getting a "short-squeeze" on most days as short sellers are forced to chase after prices that are bid up near market close. The major indexes have ended higher 11 of the last 12 days and most have recorded eight consecutive weekly gains. It has been quite a run for the bulls and the bears must be pulling their hair out. These incremental gains generally are not problematic with market neutral trades – you should be able to easily do adjustments if necessary. It's the big steps, like last Friday's jump in the DOW and S&P that cause a certain amount of consternation. Large moves can happen anytime and though next week there is another round of earnings reports due from bellwether companies like 3M and Caterpillar, plus the two-day Federal Reserve meeting, depending on what we hear, there may or may not be a significant market reaction. Obviously we prefer the methodical deliberate moves for our iron condor positions, and hopefully traders have already priced in what they expect to hear next week and we can avoid major surprises.

SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday April 23rd. This position has been open for 23 days:
The entire position is approx. $1,260 in the red
SPY closed at $121.81
30-day historical volatility and implied volatility are extremely low - both volatility numbers are near 52 week lows, 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 bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is neutral (See SPY chart)

SPY Bear Call Spread
This spread is approx. $2,160 in the red (see tables below)
$121 strike price short call delta is .5788 (42% probability this position will be profitable)

SPY Bull Put Spread
This spread is approx. $900 in the black (see tables below)
$111 strike price short put delta is -.0645 (93% probability this position will be profitable)

SPY Risk Analysis
The April 18th Couch Potato SPY Risk Analysis section mentioned"...Unless the bears follow up on the recent pullback and drive the SPY price down to around $115 the most probable risk to our SPY iron condor is the $121 short call will continue to be threatened." The threat became real and last week's series of short squeezes drove the SPY decisively through short-term resistance. Now the question is whether the bulls have enough juice to get through the 61.8% Fibonacci retracement level from the March 2009 low (which is $122). We probably will need to roll up our current short call to higher strike, but the issue is the timing of the adjustment. There is plenty of time left until May options expire and it should not hurt to wait a few days to see how the market reacts to next week's Federal Reserve meeting. It is not worth the risk to do trade adjustment today, and then have prices surge after the fed meeting which might require another adjustment!

DIA Position Update
Listed below is the status of our DIA Iron Condor trade as of Friday April 23rd. This position has been open for 8 days:
The entire position is approx. at break-even
DIA closed at $111.96
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 bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is neutral (See DIA chart)

DIA Bear Call Spread
This spread is approx. at break-even (see tables below)
$114 strike price short call delta is .2754 (72% probability this position will be profitable)

DIA Bull Put Spread
This spread is approx. $300 in the black (see tables below)
$108 strike price short put delta is -.2016 (80% probability this position will be profitable)

DIA Risk Analysis
Once again, the DIA ended the week higher and has gained eight consecutive weeks. Since its February lows, DIA has basically traded in a bullish channel without deviating very much. Despite being somewhat overbought, every time stocks try to sell off, prices quickly recover and continue to climb higher. The bulls continue to have the upper hand and if the current trend continues the most probable risk is that our $114 strike short call might be threatened.

Exit Plan
The rules for exiting the SPY and DIA credit spreads 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 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 both the SPY and DIA Iron Condors as a separate orders with four legs each. Exiting these positions prior to expiration we will probably “leg out” 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 both Iron Condors is dependent on following our Exit Rules described above.

Final comment
Trading what we see and not what want or expect is the operative word in the current market. Everybody and their brother are anticipating a stock price pullback, and they are probably correct, but it is just the timing of when this will happen that no one can predict. Technical analyst can pull out indicators, oscillators, chart patterns, volume numbers, candles, etc. that suggest a pending price correction. All of these tools have validity when used in the proper context, but the market has it own mind and goes in whatever direction is wants regardless of what the technical indicators say. We appear to be in a new world order where the historical precedents set in the past may not be as applicable in this new world. The best opportunity for market neutral traders in current environment is to continue to evaluate and monitor risk. The point is that for our trading strategy it is not critical to guess where prices will be in the future, but based on what is happening right now we need to figure out what is the risk to our open position(s) and have plan in case the threat becomes real. We have discussed this concept in the past; the focus is to try to act like insurance companies i.e. only accept certain risk, and try to avoid losses, but if it becomes inevitable, keep it to a minimum and live to fight another day.

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.