The July 10th Couch Potato Market Summary mentioned "...Second quarter earnings season begins next week. Depending on how investors interpret the results will determine whether stock hold on to the recent gains. After the initial batch of earnings reports we should know whether stocks have bottomed. If we have a firm support level, then the next question is whether stocks will exceed recent highs, or trade range-bound..."
The analysis is still valid as stocks ended this week down slightly. Most observers appear to be betting on continued range-bound trading â€“ but as mentioned previously, the market usually does what most people don't expect.
Range bound trading certainly can work for trading credit spreads, the issue is the current high volatility and being patient enough to wait on the proper trade setup. The best chance for a profitable trade in the current environment is to wait for the market to come to us â€“ identify a level where we can initiate a high probability credit spread and generate an acceptable premium to justify the risk. We have previously discussed this concept, the strategy is to manage our trades similar to how insurance companies do business â€“ take on acceptable risk and minimize losses.
SPY Position Update
We opened and closed a series of calendar call and bull put spreads from the June option expiration month through June quarterly expiration and ending with the July expiration. The next result is an approx. $4,000 net gain for all the trades during the two months.
SPY closed $106.66 on Friday â€“ the current August position is approx $900 in the black
SPY dropped BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW its 20-day Bollinger Band SMA (see SPY chart)
SPY is BELOW its 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 neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is basically neutral (See SPY chart)
SPY Bear Call Spread
The July 14th Couch Potato recommended an August expiration month call spread
This spreads is approx. $900 in the black (see tables below)
SPY Risk Analysis
As previously discussed, we are getting good results in the current market by "legging" into our iron condor spreads. We have not had an opportunity to open a put spread, therefore the only risk is a stock price surge threatening our $115 strike price short call.
DIA Position Update
Similar to the SPY above we opened and closed a series of calendar call and bull put spreads from the June option expiration month through June quarterly expiration and ending with the July expiration. The next result is an approx. $3,900 net gain for all the trades during the two months.
DIA closed at $101.01 on Friday â€“ the August position is approx. $300 in the black
DIA has dropped BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading at its 20-day Bollinger Band SMA (see DIA chart)
DIA is BELOW its 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 neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is neutral (See DIA chart)
DIA Bear Call Spread
The July 8th Couch Potato recommended an August expiration month call spread
This spreads is approx. $300 in the black (see tables below)
DIA Risk Analysis
Similar to the SPY Risk Analysis above, we have not had an opportunity to open a put spread, therefore the only risk is a stock price surge threatening our $106 strike price short call
The rules for exiting the SPY and DIA bear call 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) AND after market close, if the delta associated with the short strike 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
As opined in previous Couch Potato commentary, high volatility is not the idea environment for trading iron condors. But we also discussed techniques to help manage the inherent risk in high volatility markets. Our recent trading strategy of selecting lower risk opportunities to leg into credit spreads is getting favorable results. It is reasonable to expect stock prices to continue to whip up and down while there is a lot of uncertainty about the economy. Eventually, we might need to "tweak" our trading rules to adapt to how the market changes â€“ but as long as the current strategy is working we should roll with 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.