The January 9th Couch Potato Market Summary mentioned ...Bulls are continuing to squeeze the shorts every time the bears think it is their turn to take over. When stocks head south the bulls are clearly frustrating the bears by stepping in at the support level to drive prices back up. Also, money managers want to prop up the market to entice retail buyers as they redistribute their portfolios and dump unwanted shares. The near term trend is still bullish, and we mentioned before that a pause is good for bullish traders because it gives the market a chance to absorb overbought conditions...
For us it became clear that traders were determined to push prices higher after receiving the following tweet on Wednesday "CBOE OPEN OUTCRY PIT TRADE: SPDR S&P 500 ETF TRUST -- $SPY : February 126â€”121 put spread trades 10,000 times for 94 cents." And as confirmed in the chart below, on that same day, the SPY price gapped above resistance ended the week at the highest level in over two years. There was mixed economic news including a China rate increase, continued Euro-zone debt uncertainty, higher unemployment claims; and favorable data on import prices, retail sales, and earning results. From a technical analysis perspective, the major indexes are extremely overbought and due for some sort of pullback. But clearly, the bulls have a firm grip on price direction, plus overbought conditions can last indefinitely.
SPY Position Update
SPY closed $129.30 on Friday â€“ the January position is approx. $2,300 in the red
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 neutral (See SPY chart)
The December 20th Couch Potato published a January expiration month call spread
This spread is approx. $2,300 in the red (see tables below)
$128 strike price short call delta is .7080 (29% probability this position will be profitable)
SPY Risk Analysis
On Wednesday the SPY price gapped above the $128 short call. January options expire at the close of business on Friday and we will need to exit this trade prior to expiration. As indicated in the chart above, SPY is extremely overbought and due for a pullback, but no one knows when this will happen.
The rules for exiting the SPY and call spread are:
As mentioned above, January options expire this Friday and our call spreads is already in the money (loss position). We don't want to get assigned on any of the short call contracts and we definitely want to minimize our potential loss. On Monday the market is closed for the holiday, within the next few days we expect to do a trade adjustment to exit the position.
The January 9th Couch Potato Final Comment mentioned "... as displayed in the SPY chart above, the axiom of old resistance becomes new support was valid as buyers stepped in to keep the price from dropping below $126. Obviously we want follow-through on the current signs of a possible price pullback, otherwise we might need to roll out of our call spread... As the saying goes "you gotta know when to hold em and when to fold em" or something along those lines. As shown in the chart above, after entering our SPY call spread, the price climbed higher, paused at each technical resistance level, and then broke through, without any significant pullback. We have mentioned before how this type of price action is the bane of credit spreads. The challenge in this situation is not so much losing on the call side, but not having a real chance to hedge our bet with a put spread. Losses are an inevitable part of trading (regardless of what you might read on certain promotional material). We have been on decent roll lately and I expect that we will continue to do well.
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.