The operative word is flat. Stocks were basically flat for the week, flat for the year and flat could be used to describe August and September which are considered the worst trading months of year. Most of the pundits and talking heads appear to be projecting near term range-bound trading which one could describe as a flat market. The drum beat of negative economic reports appears to be wearing down the bulls and without company earning reports to prop up the market, the path of least resistance is down.
Since almost everyone and most of the technical and fundamental indicators appear to signal further range-bound trading, from a contrarian perspective maybe it is time for the inevitable price break-out? Prior to the recent price pullback there were murmurs that we might have a break to the upside. That proved to be a false break-out and now the chatter is whether there will be a downside break? No one would argue that the current trading range will last indefinitely, but when the break will happen and which direction, no one knows. Until the market signals otherwise, we should expect continued range-bound trading. And as reflected in our recent trading results, the range-bound trading is the ideal scenario for our trading strategy.
SPY Position Update
SPY closed $107.53 on Friday
SPY is 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 just 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 bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)
SPY Bear Call Spread
The August 19th Couch Potato recommended a September expiration month put spread
Maximum Risk $8,780
Margin Requirement $10,000
$101 strike price short put delta is .2085 (80% probability this position will be profitable)
SPY Risk Analysis
We have not had an opportunity to open a call spread, therefore the only risk is prices continuing to fall and threatening our $101 strike price short put.
As with initiating the trade, the decision process for exiting our SPY Bull Put spread will be simple:
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 below the short put) 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 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.
The August 14th Couch Potato Final Comment mentioned "... the obvious question is whether the recent price pullback will turn into something more substantial. August monthly options expire this week and we should find out if the 50-day SMA will hold up as support for the major stock indexes..." Support failed at the 50-day SMA and now the next question is whether the recent technical support levels with hold â€“ defined as approx. $106 for the SPY and $100 for the DIA.
As we have been discussing ad nauseam in the Couch Potato, constant triple digit moves in the DOW and S&P tend to support legging into our iron condor credit spreads when prices reach support (put spread) or resistance (call spread). This technique provides a little wiggle room if prices turn against our position after entering the spread. The obvious risk is that after initiating one side of the iron condor, we need prices to move far enough in the other direction for us to enter the other side. If the stocks don't move, then we might end up without the hedged position that defines an iron condor. But the current plan is getting results as we are generating gains on most of our trades. We prefer to trade what the market tells us, and we should maintain the current strategy until we get the signal to change.
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.