Trading volume is expected two be relatively light the final two trading weeks of the year. Many traders will be taking time off for the Christmas and New Years holidays as no major economic events are scheduled. Actually, market sentiment has not changed much in the past few weeks as we mentioned "... Institutional investors want to secure year-end bonus and will do whatever is necessary to keep stock prices from falling very much. The big boys will probably try to sustain the market at least through the end of the years...The bulls clearly have way too much ammo for the bears to deal with at this point in time...The best bet for the bears is that the current bullish trend could soon run out of steam... Investors have grown complacent as measured by the CBOE Volatility Index (VIX). The VIX is at its lowest level since last April..."
Generally, most of the economic news has been positive. We got the extension of the Bush-era tax cuts everyone has been expecting; most corporate earnings reports have been good with upbeat future earnings guidance. The unemployment claims number is at least going in the right direction, though it is not yet good enough to decrease the unemployment rate. Home construction numbers may have bottomed out and retail sales have risen five consecutive months. The only fly-in-the-ointment is investors' disappointment over the European Unionâ€™s response to the seemingly endless Euro-zone debt crisis. Asian markets are also on the worry list as Chinese stocks remained sluggish on persistent concerns over further tightening measures from Beijing. It seems that most pundits expect little volatility over the next few weeks with prices remaining near the recent highs. And of course as proven over-and-over, usually most people are wrong about what they think the market will do.
SPY Position Update
SPY closed $124.30 on Friday â€“ the December position is approx. $600 in the black
SPY is priced 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 also 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)
The December 5th Couch Potato published a December Quarterly expiration month call spread
This spread is approx. $100 in the black (see tables below)
$126 strike price short call delta is .2642 (74% probability this position will be profitable)
SPY Bull Put Spread
The November 28th Couch Potato published a December expiration month put spread
On December 5th the Couch Potato suggested closing out the entire SPY put spread for an approx. $500 profit (see tables below)
SPY Risk Analysis
Momentum has slowed down a little as the S&P basically ended the week where it started. If traders feel the need to push stock prices higher over the holidays we might need to adjustment the December Quarterly expiration $126 strike price short call.
IWM Position Update
IWM closed at $78.02 on Friday â€“ the December position is approx. at break-even
IWM is priced ABOVE its current 14-day EMA (see IWM chart down below)
IWM is trading ABOVE its 20-day Bollinger Band SMA (see IWM chart)
IWM is ABOVE its 50-day simple moving average (see IWM chart)
IWM is also priced ABOVE its 200-day simple moving average (see IWM chart)
Relative Strength Indicator (RSI) is extremely bullish (See IWM chart)
Moving Average Convergence/Divergence (MACD) is bullish (See IWM chart)
IWM Bear Call Spread
The November 28th Couch Potato recommended a December expiration month call spread
On December 14th the Couch Potato suggested closing out this spread to adjust to higher strike prices (see tables below)
The December 14th Couch Potato published the trade adjustment to roll the initial December call spread to the end of the month (December Quarterly). Also note the increase in the number of contracts â€“ this will help minimize the loss. The trade adjustment should reduce the loss to approx. break-even (see table below)
IWM Risk Analysis
Similar to the SPY Risk Analysis above, the Russell 2000 index basically ended the week flat. Recently, small-cap stocks have been outperforming large-caps and if this trend continues we may need to close-out the December Quarterly expiration $79 strike price short call.
The rules for exiting the SPY and IWM call spreads are:
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 price above our short call) 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 short strike price.
The December 12th Couch Potato mentioned "...we have to adjust our IWM call spread, but fortunately this should not be a problem since we can buy additional time by rolling up to the end-of-month quarterly expiration..." Obviously a lot of investors love quarterly expiration months because it provides more options for our options plays. If a trade goes against you then you have the opportunity to do an adjustment within the same month instead of having to roll out to another expiration month. Weekly options have become popular, but they are not available until the Thursday prior to the week they expire; and this is generally a high risk play that won't generate much credit, especially for doing trade adjustments. We are banking on slow trading for the last two weeks of the year to make our trade adjustments work. However, if the market does go against our trade adjustments, then job one is to exit the position(s) with a minimal loss.
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.