Market Summary
Positive company reports and favorable economic data appear to be overshadowed by the European debt crisis. 459 of the S&P 500 companies have reported earnings and first quarter results are reported to be up 56.60%, and 77% of the results having exceeded estimates – above the typical 61%. The major stock indexes were churning up in a bullish channel and then prices suddenly fell off a cliff when the Greek debt problem became headline news. This turn of events appears to lend credence to the perception that investors factor future economic expectations into current stock prices. For most of last year stocks surged higher even though much of the economic news was somewhat negative – investors factored in future favorable company earnings that are currently being reported. With the mounting debt in Europe and the U.S., plus austerity measures in Asia, maybe the current market bearishness indicates that investors perceive limited growth potential for the rest of the year?

A change in market sentiment in of itself should not necessarily be a problem with market neutral trades similar to the iron condor. The bigger issue is increased volatility as the bears push prices down and the bulls shop for bargains and "squeeze" the shorts. We are not getting an orderly bulls-to-bears transition as stocks are getting slammed hard on the downside and making it difficult to do trade adjustments. Volatility is manageable if you set up your trade to accommodate high levels. Unfortunately you may be somewhat handcuffed if volatility surges after initiating a market neutral trade. Depending on how much time is left and market behavior we can still do adjustments or other techniques to salvage the trade.

SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday May 14th. This position has been open for 44 days:
The entire position is approx. $2,400 in the red
SPY closed at $113.89
Both the 30-day historical and implied volatility numbers are at the upper levels of their respective 52-week ranges – this is considered bearish
SPY is priced BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW its 20-day Bollinger Band SMA, and 50-day simple moving average (see SPY chart)
SPY is still ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is 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. $900 in the black (see tables below)
Our $124 strike price short call delta is .0107 (99% 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 $4,000 in the red (see tables below)
Our $117 strike price short call delta is -.8139 (19% probability this position will be profitable)

SPY Risk Analysis
There is the risk of assignment on the short put and in a few days we will evaluate whether to close out this spread or roll down the short put strike price to minimize the loss.

DIA Position Update
Listed below is the status of our DIA Iron Condor trade as of Friday May 14th. This position has been open for 29 days:
The entire position is approx. $1,300 in the red
DIA closed at $106.51
Both the 30-day historical and implied volatility numbers are at the upper levels of their respective 52-week ranges – this is considered 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 and 50-day simple moving average (see DIA chart)
DIA is still ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) bearish (See DIA chart)

DIA Bear Call Spread
This spread is approx. $980 in the black (see tables below)
$114 strike price short call delta is .0250 (97% probability this position will be profitable)

DIA Bull Put Spread
This spread is approx. $2,240 in the red (see tables below)
$108 strike price short put delta is -.6594 (34% probability this position will be profitable)

DIA Risk Analysis
Similar to the SPY Risk analysis above there is the risk of assignment on the short put and in a few days we will evaluate whether to close out this spread or roll down the short put strike price to minimize the loss.

Exit Plan
At this point, minimizing losses is job one. Normally we would exit the SPY and DIA call spreads at their current price, but it is not worth paying the commission since there is almost no chance prices will reach the short calls strike prior to May expiration. Stocks are oversold and if we get a "dead cat bounce" in the next few days we may be able to recover some of the loss on our put spreads. We have a few days to make a decision on whether to exit out of the put spreads or roll down the short strikes. The risk of assignment increases as expiration week progresses and we need to exit out of the in-the-money strikes prior to the end of the week.

Final Comment
The May 9th Couch Potato Final Comment section mentioned "... market sentiment has changed – the bears are gorging and the only question is how long the feast will last..." . Although it may not seem like it after Thursday and Friday's price pullback, but the major stock indexes ended the week higher. The question is whether the bears will get greedy and force prices back down to the their 200-day SMA support level; or will bottom feeders scoop up oversold stocks and have the market trade range-bound for a while? It may take a few weeks to be able to reasonably gauge market direction because often volatility increases during option expiration week – yes just like the past few weeks.

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.