Wednesday, June 02, 2010 11:19:39 PM EDT Trade Update!!! by Gregory Clay Click here to email Gregory Clay

SPY ETF Trade Setup
We are opening a June Quarterly expiration SPY Iron Condor
SPY closed at $110.33 on Thursday (28 days to June Quarterly option expiration)
SPY is priced near 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 trading near its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is neutral and turning up (See SPY chart)
Moving Average Convergence/Divergence (MACD) is starting to turn up (See SPY chart)

30 day Historical Volatility is 28.22%, Implied Volatility is 30.53% - both numbers are near the upper level of their 52-week range
Upper range standard deviation is .84162, the lower range is -.84162
Use the number of days to expiration, volatility number and the standard deviation to calculate the 80% statistical probability for the option price to close within our short strikes at expiration.

We want the SPY Bear Call spread short strike to exceed defined resistance levels :
$115 calculated based on previous intraday highs and technical resistance levels
$117 equals the upper price level of our 80% statistical probability range
$124 is the upper level of the Bollinger Band – Upper solid purple line in the SPY chart below

The Bull Put spread short strike price should be below defined support levels:
$105 calculated based on previous intraday lows and technical support levels
$105 equals the lower price level of our 80% statistical probability range
$105 is the lower Bollinger Band level – Lower solid purple line in the SPY chart below

We want the call and put spreads to each generate a minimum .50 net credit AND we prefer that the short strikes fit our statistical probability profile (80% chance all the options will expire worthless and we get to keep most of the sold premium).

PLEASE NOTE that we are initiating a July-June Quarterly (Qty) Bear Call Spread (based on Wednesday's closing prices) – this is also referred to as a calendar spread. The recommendation is to submit a limit order to purchase/sell the option strikes prices below. Please confirm the correct option symbols with your broker.

20 contracts traded (number of contracts can be increased or decreased based on risk tolerance and/or funds available to trade; this will impact Total Premium Received, Maximum Risk amount, and Margin Required)

PLEASE NOTE that we are initiating a June Quarterly (Qty) Bull Put Spread (based on Wednesday's closing prices). The recommendation is to submit a limit order to purchase/sell the option strikes prices below. Please confirm the correct option symbols with your broker.

The 10 contracts referenced above PLUS the 10 put spread contracts traded in the May 30th Couch Potato will hedge the 20 call (calendar spread) contracts shown above.

DIA ETF Trade Setup
We are opening a June Quarterly expiration DIA Iron Condor
DIA closed at $102.61 on Wednesday (28 days to June Quarterly option expiration)
DIA is priced at 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 trading near its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is turning neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish but starting to turn up (See DIA chart)

30 day Historical Volatility is 26.28%, Implied Volatility is 27.39% - both numbers are near the upper level of their 52-week range
Upper range standard deviation is .84162, the lower range is -.84162
Use the number of days to expiration, volatility number and the standard deviation to calculate the 80% statistical probability for the option price to close within our short strikes at expiration.

We want the DIA Bear Call spread short strike to exceed defined resistance levels :
$107 calculated based on previous intraday highs and technical resistance levels
$107 equals the upper price level of our 80% statistical probability range
$114 is the upper level of the Bollinger Band – Upper solid purple line in the SPY chart below

The Bull Put spread short strike price should be below defined support levels:
$98 calculated based on previous intraday lows and technical support levels
$98 equals the lower price level of our 80% statistical probability range
$98 is the lower Bollinger Band level – Lower solid purple line in the DIA chart below

We want the call and put spreads to each generate a minimum .50 net credit AND we prefer that the short strikes fit our statistical probability profile (80% chance all the options will expire worthless and we get to keep most of the sold premium).

PLEASE NOTE that we are initiating a July-June Quarterly (Qty) Bear Call Spread (based on Wednesday's closing prices) – this is also referred to as a calendar spread. The recommendation is to submit a limit order to purchase/sell the option strikes prices below. Please confirm the correct option symbols with your broker.

20 contracts traded (number of contracts can be increased or decreased based on risk tolerance and/or funds available to trade; this will impact Total Premium Received, Maximum Risk amount, and Margin Required)

PLEASE NOTE that we are initiating a June Quarterly (Qty) Bull Put Spread (based on Wednesday's closing prices). The recommendation is to submit a limit order to purchase/sell the option strikes prices below. Please confirm the correct option symbols with your broker.

The 10 contracts referenced above PLUS the 10 put spread contracts traded in the May 30th Couch Potato will hedge the 20 call (calendar spread) contracts shown above.

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. 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 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.

Final Comment
The May 30th Couch Potato Final Comment section stated "...We may end up "legging" into a June expiration month iron condor(s). The recent extremely high volatility has subsided somewhat, and prices may have found bottom. .. 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..."

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.