Big Ben Bernanke's pep talk, potential merger activity and some short covering boosted stocks on Friday and erased most of the losses for the week. Many analysts probably consider it a good sign that considering the constant deluge of unfavorable economic reports, prices have not broken down further. Maybe the best sign the market would not dip deeper is the fact that is seems this is what everyone expects. One thing you can count on with absolute certainty is that most people will be wrong about what the stock market will do.
One reason market neutral trading works is because you don't have to guess price direction â€“ you just need to calculate probable support where traders will step in to buy and resistance where they are likely to sell. This really is more predictive of success with market neutral trading compared to trying to figure out where stocks are headed. Of course, as we have been harping on lately, the current range-bound trading environment make this type of trading easier to manage compared to when prices are trending upward or downward. In the past we used the analogy of comparing the market to a good looking woman who tends to get away with doing what she wants, no matter what everybody else thinks. Lately she has been somewhat enamored with us, and has been treating us nice, the question is how long it will last?
SPY Position Update
SPY closed $106.86 on Friday â€“ the current position is approx. at breakeven
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 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 turning neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)
SPY Bull Put Spread
The August 19th Couch Potato recommended a September expiration month put spread
This spread is approx. at breakeven (see tables below)
$101 strike price short put delta is -.1862 (81% 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.
DIA Position Update
DIA closed at $101.58 on Friday â€“ the position is approx. $600 in the black
DIA is BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading BELOW 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) turned neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)
DIA Bull Put Spread
The August 25th Couch Potato recommended a September expiration month put spread
This spread is approx. $600 in the black (see tables below)
$96 strike price short put delta is -.1575 (84% probability this position will be profitable)
DIA Risk Analysis
Similar to the SPY above risk analysis above, we have yet to do a call spread, therefore the only risk is relates to our $96 strike price short put.
As with initiating the trade, the decision process for exiting our SPY and DIA Bull Put spreads 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 22nd Couch Potato Final Comment mentioned "... 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..." The previous SPY support level failed and the recent chart action suggest $104 may now hold as near-term support. DIA support basically held up as prices danced around it for a few days and may be turning up. If the major indexes can somehow break through significant overhead resistance, then we should be able to initiate credit spreads to complete the iron condor set up. We will probably consider a September quarterly option expiration call spread or maybe an October/September calendar spread â€“ it depends on how stock prices move over the next few weeks.
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.