Thus far the month of September has not lived up to its reputation as historically the worst month for trading stocks; but we still have a ways to go and may yet get the end-of-summer swoon. Most of the major stock indexes are near resistance levels but have not been able to confirm an upside break-out. There is suspicion that last Friday's quadruple witching day may have actually prevented a price pull back. Many people are noting that anemic trading volume justifies lack of confidence in the recent price surge. But the score still counts â€“ stock gains or losses are not adjusted based on the amount of volume. Also, a legitimate question is how much does volume really matter. Several analyst have noted that retail investors have been absent from the market for a long time. Also, if it is true that the high frequency traders control approximately 40% of trading volume this might mitigate the value of "volume" in estimating the strength of a trend?
Next week we should find if stocks have the juice to finally push above resistance. We have the Federal Reserve meeting, the housing market index, and existing home sales data. Prices are consolidated in a tight trading range, coiled like a tight spring and may be ready to bounce â€“ up or down. Depending on how traders interpret the weeks economic news may determine if we get the next price surge, north or south, that everyone seems to be predicting. Our recent trading strategy has been getting positive results in the current market. All trends eventually come to an end, when that happens we may need to adjust, but until then we should continue to take what the market is giving us!
SPY Position Update
SPY closed $112.49 on Friday â€“ the current August position is approx. $400 in the red
SPY is ABOVE its current 14-day EMA (see SPY chart down below)
SPY is trading ABOVE its 20-day Bollinger Band SMA (see SPY chart)
SPY is ABOVE its 50-day simple moving average (see SPY chart)
SPY is priced ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bullish (See SPY chart)
SPY Bear Call Spread
The September 9th Couch Potato recommended an October expiration month call spread
This spread is approx. $400 in the red (see tables below)
$115 strike price short call delta is .3270 (67% probability this position will be profitable)
SPY Risk Analysis
Until we have an opportunity to open a put spread, the only risk is prices continuing to rise and threatening our $115 strike price short call.
DIA Position Update
DIA closed at $106.07 on Friday
DIA is ABOVE its current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE its 20-day Bollinger Band SMA (see DIA chart)
DIA is ABOVE its 50-day simple moving average (see DIA chart)
DIA is priced ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bullish (See DIA chart)
DIA Bear Call Spread
The September 16th Couch Potato recommended an October expiration month DIA call spread (see tables below)
Premium Credit $.58
Total Option Premium Received $1,160 (Excludes commissions and fees)
Maximum Risk $8,840
Margin Requirement $10,000
DIA Risk Analysis
Similar to the SPY Risk Analysis above, we have not opened a DIA put spread, therefore the only risk is prices breaking through near term resistance and threatening our $109 strike price short call.
The rules for exiting the SPY and DIA bear call credit spreads are:
Anytime the market maker is willing to accept a limit price of less than .11 on the short strike, 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 the short strike is penetrated (closing price above the 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.
The market mood has really not changed much over the past month; everyone is waiting to see if there will be a confirmed price break-out above the recent trading range. The bulls are doing an admirable job squeezing the shorts and pushing prices to near-term resistance. If/When prices pull back from recent highs we will look to open put spreads to hedge our short calls and complete the iron condor position(s). Again, the key is to be patient and let the opportunity come to us, versus feeling the need to force a trade.
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.