Market Summary
All signs point to further downside for the stock market. Most technical indicators are bearish, prices are at the lowest level in four months and stocks are not even grossly oversold yet! Friday was the third-worst down-slide of the year and pushed the major indexes officially back into a "correction". Individual investors were quick to abandon stocks in May after they had begun testing the waters a bit in March and April. Investors are still smarting from the winter 2008 market plunge. Recent volatility and the "flash crash" have sent investors running for the doors.

Prior to Friday's drubbing it was easy to argue that stocks might have bottomed. Prices are right at the 5-month support level and if this does not hold, all bet are off concerning when the bleeding will stop. We will closely watch our bullish positions, and if current support is violated job-one is taking the steps to minimize potential losses.

SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday June 4th:
The entire position is approx. $300 in the red
SPY closed at $106.82
30-day historical volatility and implied volatility are near the upper level of their 52- week range - this is considered bearish
SPY has dropped well 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 priced 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 Bear Call Spread
This spread is approx. $950 in the black (see tables below)
$115 strike price short call delta is .0688 (93% probability this position will be profitable)

SPY Bull Put Spread(s)
The June regular expiration (Reg) month put spread is approx. $430 in the red (see tables below)
$104 strike price short put delta is -.2901 (71% probability this position will be profitable)

The June Quarterly expiration (Qty) month put spread is approx. $845 in the red (see tables below)
$104 strike price short put delta is -.3398 (65% probability this position will be profitable)

SPY Risk Analysis
We expect to close out our short call; therefore the only risk is prices decisively breaking below the 50-week SMA which has been the recent support level. A drop below support would threaten our short put(s) and force us to consider adjusting one or both put spreads

DIA Position Update
Listed below is the status of our DIA Iron Condor trade as of Friday June 4th
The entire position is approx. at break-even
DIA closed at $99.44
30-day historical volatility and implied volatility are near the upper level of their 52- week range - this is considered bearish
DIA has dropped well 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 priced 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)

DIA Bear Call Spread
This spread is approx. $850 in the black (see tables below)
$107 strike price short call delta is .0520 (95% probability this position will be profitable)

DIA Bull Put Spread
The June regular expiration (Reg) month put spread is approx. $300 in the red (see tables below)
$97 strike price short put delta is -.2877 (71% probability this position will be profitable)

The June Quarterly expiration (Qty) month put spread is approx. $300 in the red (see tables below)
$97 strike price short put delta is -.3347 (66% probability this position will be profitable)

DIA Risk Analysis
Similar to the SPY risk analysis above, we will be closing out our short call; therefore the only risk is prices decisively breaking below the 50-week SMA which has been the recent support level. A drop below support would threaten our short put(s) and force us to consider adjusting one or both put spreads

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
We "legged" into our current SPY and DIA iron condors (separate orders for the put and call spreads). Generally, it cost more in commissions and fees compared to doing one order for all four legs. Plus there is the risk of not getting either the put or call sides in play and we could end with an unintentional directional play that could go against us. However, the current high market volatility and daily triple digit moves justifies waiting to open a call spread when prices are near resistance and initiating the put spread at support. Also, this allows us to adjust the timing and trade legs at different intervals, instead of "going all in" on one trade. This technique helps mitigate the recent problem of initiating an iron condor, and having the market gap the next day, and converting a good trade into a bad trade.

Technically, one could argue that our current position(s) are not "officially" iron condors (short strikes equidistant from underlying index prices, same expiration's dates, etc.). Whatever term strikes ones fancy – calendar spread, call spread and put spread, bear call and bull put, etc., the net result is similar, we have a hedged position. Also, the market gave us a gift as we initiated the call spread(s) on Thursday and Friday's carnage should allow us to close out the short calls at our target profit after only one day!

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.