Investors and analyst appear to be even more pessimistic about a "V" shaped economic recovery. Employment and housing numbers have been unfavorable and our government leaders are clueless concerning what to do about it. More and more, people are anticipating a "W" shaped recovery and this perception may be reflected in the current market trend. Stocks two-week winning streak ended with a weekly loss and technical indicators are trying to roll over. Pronouncements from last weeks Federal Open Market Committee (FMOC) meeting were not very encouraging. The question is whether the current market is merely a correction to the extreme price advance off bear-market lows, indicating that prices may trade short-term range bound. Or are stocks going to trend down in the near future?
SPY Position Update
SPY closed $107.87 on Friday â€“ the entire position is approx $2,800 in the black
SPY is priced BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading just BELOW to its 20-day Bollinger Band SMA (see SPY chart)
SPY is well BELOW its 50-day simple moving average (see SPY chart)
SPY has dropped BELOW its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is basically neutral (See SPY chart)
SPY Bear Call Spread
These spreads are approx. $2,200 in the black (see tables below)
The June Quarterly (Qty) expiration $114 strike short call delta is .0192 (98% probability this position will be profitable)
The July option expiration $116 strike short call delta is .0548 (95% probability this position will be profitable)
SPY Bull Put Spread(s)
These spreads are approx. $645 in the black (see tables below)
The June Quarterly (Qty) expiration bull put $104 strike price short put delta is -.1337 (87% probability this position will be profitable)
The July option expiration bull put $104 strike price short put delta is -.2849 (72% probability this position will be profitable)
SPY Risk Analysis
Unless something extraordinary happens over the next few days we should expect our June quarterly short call and short put options to expire worthless and we keep the entire premium. After our quarterly options expire we still have July call and put options in play. Basically, stocks are trading range-bound, but the path of least resistance is downward. Unless there is a change in market momentum, the most probable risk is that our July $104 strike short will be threatened.
DIA Position Update
DIA closed at $101.72 on Friday â€“ the entire position is approx. $2,500 in the black
DIA is priced BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading EVEN with its 20-day Bollinger Band SMA (see DIA chart)
DIA is BELOW its 50-day simple moving average (see DIA chart)
DIA is priced just BELOW its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is basically neutral (See DIA chart)
DIA Bear Call Spread
These spreads are approx. $2,000 in the black (see tables below)
The June 24th Couch Potato mentioned closing out our June quarterly expiration $106 short call for an approx. $600 profit
The July option expiration $107 strike short call delta is .1101 (89% probability this position will be profitable)
DIA Bull Put Spread
This spread is approx. $450 in the black (see tables below)
The June Quarterly (Qty) expiration bull put $104 strike price short put delta is -.0767 (92% probability this position will be profitable)
DIA Risk Analysis
Similar to the SPY Risk Analysis above, the June quarterly options should expire worthless. After the June quarterly options expire the only risk exposure is our July expiration $107 short call.
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 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.
Stocks break-out attempt over the 200-day SMA's thus far has failed and prices have not dropped below recent support levels. For the past month or so stock prices have basically traded range-bound â€“ this is reflected in the fact that we have been successful with all of our recent trades. Market volatility is still relatively high, but has pulled back from excessive levels. We have to trade what the market gives us, not what we want â€“ but we do want the current range-bound trading to continue. Stock trends never stay the same, but when we have a favorable situation we will take advantage of it!
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.