The October 10th Couch Potato Market Summary mentioned "... The price break above the recent trading range appears to be mostly driven by investors' belief that the fed will further stimulate the economy... traders appear to be betting that the fed will provide the demand to drive prices higher..."
Stocks did not move very much last week, traders may have already priced in the expectation for the Fed's quantitative easing. And it appears to be a forgone conclusion that Republicans will take over Congress in a few weeks so the final election results may not impact the market much. Stocks are clearly overbought, but an overbought rally can continue on indefinitely. Retail investors may not be participating much, but banks, corporations, and other institutional money managers have plenty of money to drive stock prices higher. The best bet at this point is that stock will continue to grind higher. Though a lot of people are guessing that a correction has to happen soon, the market is final arbiter of if and when that will occur.
The October 10th Couch Potato also stated "...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 ... 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...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..." One advantage of an overbought rally for trading credit spreads is the lower probability of huge upside gaps instantaneously turning a low risk trade into a bad trade. The recent upside breakout has been relatively orderly with prices ascending slowly. Despite conflicting technical and fundamental signals concerning the longevity of the current uptrend, we need to respect what we see and trade accordingly. Our plan for November trades is to enter calls spreads that account for the current trend, but we also will look to do put spreads to hedge the position.
SPY Position Update
SPY closed $117.70 on Friday â€“ the October call spread ended approx. $800 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
The October 10th Couch Potato recommended a trade adjustment to buy back the $115 short calls and sell twice the amount of October expiration $118 call contracts
The trade adjustment reduced a large unrealized loss to approx. $800 (see tables below)
DIA Position Update
DIA closed at $110.68 on Friday â€“ the October call spread ended approx. $300 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
The October 10th Couch Potato recommended a trade adjustment to buy back the $109 short calls and sell twice the amount of October expiration $111 call contracts
The trade adjustment reduced a large unrealized loss to approx. $300 (see tables below)
The October 14th Couch Potato alerted readers to plan on closing out both the SPY and DIA call spreads. In the past we mentioned how market volatility tends to increase during option expiration week and on expiration day all bets are off. Most of the day's economic reports were positive, but financials stocks dragged prices down at mid-day due to more news concerning the foreclosure debacle. Stocks pulled back enough in the early afternoon so that we did not need to close our short positions, or those who did exit were able to get out for a few cents. Similar to how an insurance company would handle a potential large loss, we made adjustments and the market cooperated to help minimize our loss. We may tweak our trading strategy a little bit as we prepare for our November trades.
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.