Stocks are continuing to climb the wall of worry eking a gain seven out of the last eight weeks. The bulls are clearly in charge and have been able to seize control of the market every time the bears even remotely attempt a sell-off. One can make a strong argument that stock prices are set to go higher. Reported revenue and earning numbers have been mostly good. The Fed is flooding the market with cheap money and businesses are flush with cash. The moving average numbers are being pulled higher to catch up with prices. From a technical perspective, stocks are overbought, but this has been the situation for many weeks and can continue indefinitely. Usually when the market has most people convinced it is headed in one direction, eventually it catches everyone off guard and does something different. The question is, are stocks nearing a tipping point or will the bulls continue to dominate?
SPY Position Update
SPY closed $118.35 on Friday
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 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 on the bullish side, but momentum is flat (See SPY chart)
SPY Iron Condor
The October 21st Couch Potato recommended an November expiration month iron condor (see tables below)
Premium Credit $1.13
Total Option Premium Received $2,260 (Excludes commissions and fees)
Maximum Risk $7,740
Margin Requirement $10,000
SPY Risk Analysis
Until the directional trend changes, the most probable risk is that stock prices will continue to climb and our $122 strike price short call will be threatened.
The rules for exiting the November expiration SPY iron condor are:
Anytime the market maker is willing to accept a limit price of less than .11 on one of the short strikes, buy back all the short contracts and try to sell the long position 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 sold call, or below the sold put) AND after market close, if the delta associated with one of the short strikes 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 spread.
The market finally cooperated and provided an opportunity to initiate all four legs of our iron condor. Volatility levels have receded to the lowest point since the spring â€“ this let us simultaneously do both the call and put credit spreads associated with an iron condor. The key element is that we were able achieve our preferred risk/reward profile on both sides of the trade. For most of the year volatility was too high to do a four-legged trade that would end up with the call spread above resistance and put spread below support. During most of the summer we â€œleggedâ€ into our credit spreads because that is what the market presented â€“ but the risk is/was waiting on a chance to do the other leg to hedge the position. Getting in both sides of the iron condor gives more flexibility with managing the 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.