Market Summary
The May 2nd Couch Potato mentioned "...Bear market proponents have been predicting a correction for a while and now they may be on to something... Very soon we should know whether this is the early stages of a correction, or a pause while traders figure the next price direction..." The bears must be dancing like it is 1999 - they are large and in-charge but I doubt if even the most optimistic bear anticipated last weeks severe decline. Bearish technical signals started flashing the week prior and were not confirmed until the middle of the week. Bulls who did not adjust immediately after the initial bearish sign did not have a chance as Thursday's historic market collapse was virtually instantaneous. Even the "circuit-breakers" that are supposed to be in place to prevent what happened last week apparently did not work very well?

The folks that expected a price correction can't explain what happened on Thursday – the bearish technical signals did not indicate a catastrophic plunge. The White House has promised an inquiry, suspicions about a "fat finger" trading error on the Chicago Mercantile Exchange, NASDAQ officials blamed the New York Stock Exchange for not doing their job, and Congress planned hearings next week to investigate what went wrong. Regardless of the actual reason for last weeks lightening fast market plunge, we don't get a do-over and the score still counts. Similar to the fate of most bullish plays, the put spread side of our iron condors lost money during the crash, but these positions have inherit downside protection from the long strike. Some traders are not partial to spread trades because of the limited profit potential, but if disaster strikes and you are on the wrong side of the market, a spread should save you from completely blowing out your trading account. No one likes losing trades, but losses are an inevitable consequence of the trading game and even after a bad week we are still at the table and ready to play.

SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday May 7th. This position has been open for 37 days:
The entire position is approx. $3,300 in the red
SPY closed at $111.26
30-day implied volatility has exploded to its 52-week high which is considered extremely bearish
SPY has dropped BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW with its 20-day Bollinger Band SMA (see SPY chart)
SPY is still priced BELOW its 50-day simple moving average (see SPY chart)
SPY is still slightly ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is extremely bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is extremely bearish (See SPY chart)

SPY Bear Call Spread
The April 29th Couch Potato recommended closing out the initial call spread for an approx. $200 loss and following up with a TRADE ADJUSTMENT to roll up the call spread to a higher strike price (see tables below)

The Bear Call adjustment is approx. $880 in the black (see tables below)
Our $124 strike price short call delta is .0211 (98% probability this position will be profitable)

SPY Bull Put Spread
The April 29th Couch Potato recommended closing out the original put spread for an approx. $880 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 $4,800 in the red (see tables below)
Our $117 strike price short call delta is -.7892 (21% probability this position will be profitable)

SPY Risk Analysis
Thursday was a dooms-day scenario as stocks mysteriously and instantaneously dived through all the identified support zones. Similar to the value of a lot of individual stocks, our SPY put spread was hurt because the speed of the price drop made it impossible to do an adjustment. There is the risk of assignment on the short put and if the market continues its slide the put spread loss will increase. In a few days we will decide on when to exit the put spread.

DIA Position Update
Listed below is the status of our DIA Iron Condor trade as of Friday May 7th. This position has been open for 22 days:
The entire position is approx. $2,600 in the red
DIA closed at $103.78
30-day implied volatility has exploded to its 52-week high which is considered extremely bearish
DIA is priced a BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading BELOW its 20-day Bollinger Band SMA (see DIA chart)
DIA is BELOW its 50-day simple moving average (see DIA chart)
DIA is little ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is extremely bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) extremely bearish (See DIA chart)

DIA Bear Call Spread
This spread is approx. $900 in the black (see tables below)
$114 strike price short call delta is .0304 (97% probability this position will be profitable)

DIA Bull Put Spread
This spread is approx. $4,500 in the red (see tables below)
$108 strike price short put delta is -.7516 (25% probability this position will be profitable)

DIA Risk Analysis
Similar to the SPY Risk analysis above our DIA put spread was hurt because the speed of Thursday's stock plunge made it impossible to do an adjustment. There is the risk of assignment on the short put and if the market continues its slide the put spread loss will increase. In a few days we will decide on when to exit the put spread.

Exit Plan
Thursday's unbelievable blink-of-the-eye market plunge probably rendered most of the standard stop-loss techniques ineffective. Most stop-loss orders are activated when stocks reach a certain point (e.g. percentage loss, dollar amount, etc.). With what happened on Thursday, stop-loss orders for bullish positions were activated, but stocks dropped so fast that the exit buy and/or sell order price probably generated large losses – especially orders to exit at the market price. You could argue the case that we probably should have exited our put spreads earlier, but the fact is that our short puts where not decisively penetrated until the market plunge. One of the rationales for doing option spreads is protection from a catastrophic event – from a historical perspective Thursday certainly qualifies. Trading spreads generally limits potential profits, but this strategy will save your a$$ if the unexpected occurs – this past Thursday is exhibit A.

At this point, minimizing losses is job one. In the past we discussed how our strategy is similar to how insurance companies operate. We need to figure out the potential salvage value of the asset so that we can recover some of the loss. Normally we would exit the call spreads at their current price, but it is not worth paying the commission since there is almost no chance prices will reach short call strike prior to May expiration. Stocks are severely oversold and maybe prices might snap-back and recover some of the loss on our put spreads - we have little to lose by waiting a few days to see if or how much prices recover. If the situation does not improve over the next few trading days we will probably exit the put spreads.

Final Comment
The May 2nd Couch Potato Final Comment opined "...We have time to step back see exactly what stocks are going to do – whether the current pullback is a "head fake" or a genuine change in market sentiment.." We got our answer, but even the most bearish bear could have not anticipated Thursday's surreal price plunge. Clearly, after the recent stock rise on overbought conditions, market sentiment has changed – the bears are gorging and the only question is how long the feast will last.

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.