Merry Christmas and we sincerely hope that everyone had an enjoyable holiday
Stocks are continuing the recent trend of crawling higher on generally positive economic news while prices are being constrained somewhat by global worries. This past week started with deal-making news exciting investors and ended with favorable data on consumer confidence, consumer spending, and unemployment claims. But traders are weary of the ongoing economic uncertainty over in Europe and Asia. The mixed bag of financial news along with the perception that traders are basically done for the year seems to be putting a lid on further gains. A price pullback is likely, but that might not happen until next year.
SPY Position Update
SPY closed $125.60 on Thursday â€“ the December position is approx. $400 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 extremely 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 red (see tables below)
$126 strike price short call delta is .4256 (57% 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
The SPY is approaching our $126 strike price short call â€“ quarterly options expire on Friday and we expect to have to exit this trade prior to expiration. As indicated in the chart above, SPY is overbought and due for a pullback, but no one knows when this will happen.
IWM Position Update
IWM closed at $78.72 on Thursday â€“ the December position is approx. $1,100 in the red
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 published 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.
This spread is approx. $300 in the red (see tables below)
$79 strike price short call delta is .4484 (55% probability this position will be profitable)
IWM Risk Analysis
Similar to the SPY Risk Analysis above, the IWM is at right at the $79 strike price short call. IWM is overbought and we expect to close this trade prior to the Friday expiration.
The rules for exiting the SPY and IWM call spreads are:
As mentioned above, quarterly options expire this Friday and our call spreads will be on a short leash. We are banking on the near-term price resistance along overbought conditions holding prices in check. If the closing price is above the short call strike price it is best to exit the position to minimize losses. If the price remains below the short strike(s) we plan on exiting the position prior to expiration on Friday â€“ there is always a chance that aftermarket activity could push prices over the short strike and we would automatically get assigned.
The December 19th Couch Potato mentioned "... 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..." We appear to be going down to the wire with our trade adjustments as prices have inched upward to our short strikes. As the charts above indicate, prices are overbought and due for a pullback. Obviously the best case scenario for us is for prices to stall while overbought conditions are absorbed.
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.