Market Summary
By now everyone has heard the updated market scorecard – May was the worst monthly performance since the February 2009 bear market lows, and the worst May performance since 1940. And of course the usual suspects are putting a drag on the market – BP Gulf oil spill, European debt crisis, Korean conflict, etc. Plus from a technical perspective, most of the indicators are pointing down – the only question is how much further down will prices go?

Looking at the market from our role as short-term traders, there may be some positive signs. May was ugly for bullish trades, but last week turned out to be the best week of the month. One can reasonably argue that prices have bottomed as stocks have held above their five-month support line. Volatility is still relatively high, but has pulled back from excessively high levels. Plus, stocks are oversold, and contra-indicators such as the Advisor Sentiment Index and American Association of Individual Investor Sentiment Survey may be signaling that the bleeding has stopped.

No one is suggesting the bull the bull is back – too many technical and fundamental barriers to overcome before we can have that discussion. Plus without a doubt, the path of least resistance is still downward. But at this point we know the lay-of-land and have a better idea of the risks involved in selecting a trade. We just need to listen to the market, it will let us know when to get in or out of a trade or if we should tweak our trading plan – trade what we see, not what we want.

SPY Position Update
On May 28th we opened a June expiration month SPY bull put spread
SPY closed at $109.37 on Friday (21 days to June expiration)
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 BELOW 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 Bull Put Spread
In the tables below is the May 28th SPY bull put spread (referenced in the May 27th Couch Potato) (see tables below)

SPY Risk Analysis
Until we are able to leg into the call spread side of the iron condor, at this point the only risk is stocks breaking down below recent support levels and threatening our $104 short put.

DIA Position Update
On May 28th we opened a June expiration month DIA bull put spread
DIA closed at $101.47 on Friday (21 days to June expiration)
DIA is priced 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 BELOW its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)

In the tables below is the May 28th DIA bull put spread (referenced in the May 27th Couch Potato) (see tables below)

DIA Risk Analysis
Similar to the SPY risk analysis above, until we initiate the call spread to complete the iron condor setup, the only risk is prices retreating below our $97 short put.

Exit Plan
The rules for exiting the SPY and DIA bull put 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. However, if it is a few days prior to the expiration date, we may be able to hold out for a .05 bid.

If one of our short strikes is penetrated (closing price 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 and remove the sense of urgency. 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.

Final Comment
To avoid potential confusion, we need to point out the fact that our investment guidelines have not changed – low maintenance, market neutral trades is the goal. But the absolute last thing you want to do is force a trade; we have heard the comment "sometimes the best trade is not to trade". We have been relatively successful sticking with our trading rules, if a trade setup does not fit our risk profile we need to be patient until the time is right. Using a sports analogy, it is a known fact that athletes perform better taking a shot, swinging at a pitch, throwing a punch etc. they know they can hit, versus something they don't like - the same concept applies to trading.

Our initial put spreads (referenced above) suggest that we are making a directional bet, but as stated in the May27th Couch Potato Final Comment section "...We may end up "legging" into a June expiration month iron condor(s)...we are not getting an acceptable premium credit on call spreads that fits our risk profile...Please be aware that June is a quarterly option expiration month, therefore there is plenty of time to use the June end-of-month quarterly options to add additional put or call spreads..."

We should expect to have our market neutral iron condor trade(s) in play very soon, but there is a higher probability for success if the trade is on our terms. Getting back to our insurance company example, insurers expect to suffer losses, but they won't do a deal unless it fits their risk/reward profile.

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.