Uncertain employment prospects helped keep stock prices in check most of the summer as investors perceived diminished job opportunities would restrain consumer demand for goods and services. Less consumer demand means less revenue and flat or no economic growth. One of the reasons stock prices did not crash during the summer as a lot of people anticipated is that many traders thought the job numbers would improve and motivate consumers to spend more. You have to feel for the unemployed who are desperately looking for work because it does not appear the situation will get better any time soon. Regardless of the rhetoric emanating from the White House, getting Americans back to work doesn't appear to be a priority. The price break above the recent trading range appears to be mostly driven by investors' belief that the fed will further stimulate the economy. The market does not care about the source of the funds that generate demand for stocks, whether it is increased consumer spending or fed "quantitative easing". Prices for any commodity move higher when demand exceeds supply; the employment picture may have put a damper on demand from consumers, but traders appear to be betting that the fed will provide the demand to drive prices higher.
We need to evaluate whether we should modify our trading plan to go back to initiating four-legged trades. Stocks fluctuating between support and resistance of the summer trading range justified legging into our credit spreads â€“ this is a low risk strategy when prices whip back and forth within the range. As noted previously, one risk with legging into iron condors is the market going against you and not being able to do the other side of the trade to hedge the position. If you look at the charts below you can see the decreasing distance between the upper and lower levels of the Bollinger Band. This indicates decreased volatility and minimizes the risk associated with a four-legged iron condor trade. Of course if we do the four-legged condor trade and we get the downside correction many analysts are anticipating, the Bollinger Band spreads will widen, and we might be scrambling to do trade adjustments. There is plenty of time before we need to commit to our November trades, this will give us a chance to step back and figure out the best opportunity with the least risk.
SPY Position Update
SPY closed $116.54 on Friday â€“ the current October position is approx. $2,400 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 extremely 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. $2,400 in the red (see tables below)
$115 strike price short call delta is .7061 (30% probability this position will be profitable)
We are doing a trade adjustment to roll the $115 short call to the October expiration $118 strike price. Also note the increase in the number of sold contracts â€“ this will help minimize the loss. The trade adjustment should reduce the loss to approx. $800.
SPY Risk Analysis
We have one week until October expiration and as mentioned above we are doing a trade adjustment to offset losses and improve the risk profile
DIA Position Update
DIA closed at $110.16 on Friday â€“ the current October position is approx. $1,900 in the red
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 extremely 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
This spread is approx. $1,900 in the red (see tables below)
$109 strike price short call delta is .7058 (30% probability this position will be profitable)
We are doing a trade adjustment to roll the $109 short call to the October expiration $111 strike price. Also note the increase in the number of sold contracts â€“ this will help minimize the loss. The trade adjustment should reduce the loss to approx. $200.
DIA Risk Analysis
We have one week until October expiration and as mentioned above we are doing a trade adjustment to offset losses and avoid assignment on the short contracts.
As mentioned above we need adjust our SPY and DIA bear call credit spreads.
The October 1st Couch Potato Final Comment section mentioned "... We will probably need to do trade adjustments to modify our risk profile; fortunately we have time to develop confidence for whether we are at near-term resistance level..." Though upward momentum is definitely slowing down, prices rose to the highest level since May primarily based on anticipation of new money flowing in from the Fed. Technical chart indicators suggest we are at price resistance, but October options contracts expire next week and anything might happen. Fortunately, adjusting trades when stocks break to the upside is more manageable compared to downside breakouts.
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.