The bears get a big break today as stock prices recorded the biggest loss in three months. Instead of the recent norm of prices recovering during the last trading hour, stocks plunged all the way until the end, and on extremely high volume. The major indexes are trading close to their 20-day SMA support level and some buyers may have been waiting on a dip to pick up some positions. We will use this price pullback to adjust one of our credit spreads and convert a losing position into gain â€“ or at least minimize any potential loss.
SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Tuesday April 27th. This position has been open for 27 days:
The entire position is approx. at breakeven
SPY closed at $118.48
30-day historical volatility and implied volatility have increased a bit but are still near 52-week lows
SPY has dropped BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading EVEN with its 20-day Bollinger Band SMA (see SPY chart)
SPY is still priced ABOVE its 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) has dropped to neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is turning bearish (See SPY chart)
SPY Bear Call Spread
We are closing out the entire call spread for an approx. $200 loss (see tables below)
SPY Bull Put Spread
This spread is approx. $500 in the black (see tables below)
$111 strike price short put delta is -.1582 (84% probability this position will be profitable)
SPY Risk Analysis
The April 25th Couch Potato SPY Risk Analysis section suggested that "...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..." Patience and having a plan worked in our favor as today's price pullback gave us the opportunity to close out the call spread with minimal damage. And with three weeks until May option expiration we may be able to open another call spread with a more favorable risk profile.
Since we are closing out the short $121 strike call, the only risk we have to manage is the $111 strike price sold put. The risk associated with the sold put will be evaluated and resolved based on the Exit Plan.
The rules for exiting the SPY Bull Put credit spread is:
Anytime the market maker is willing to accept a limit price of less than .11 on the short put, buy back all the short contracts and sell the long puts.
After market close, if the delta associated with the short put is .65 or higher, we will look to close out this spread (buy the short put, sell the long) and roll it out to down to a lower short strike price.
We initiated the SPY Iron Condor a separate order with four legs . As mentioned above we are closing out all the Bear Call spread contracts. The Bull Put spreads will be closed out as a separate order following the Exit Rules described above.
The April 25th Couch Potato Final Comment mentioned "... the focus is 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..." We probably discuss this ad nausea but today's trade is a good example of this concept. It would be easy to let greed and emotion persuade us to hold back on getting out of an unfavorable position on the premise that stock prices might continue to drop. The hope would be that what had been a losing trade could now make money. This scenario could occur; we could get a repeat of the January to February correction which would make staying in the trade the best move. The real deal is that the odds are against this happening, and the bigger risk is stocks bouncing back and we end up with a losing hand again. Plus, depending on how the market plays out over the next several days we may be able to do another call spread (with a more favorable risk profile). For our trading strategy, we can make money managing risk, no need to get greedy.
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.