A week ago, volatility as measured by the (VIX) volatility index surged to highest level since last May as the unrest in Egypt caused bullish traders to pause as stocks had a one-day sell off. And just when the bears started getting excited, the market decided that last weeks mixed economic news wasn't that bad â€“ and the VIX immediately dropped back down and stock prices returned to recent highs. For a day or so it appeared that the bear's long awaited sentiment change was starting to happen, but it turned into a head fake. The political unrest in Egypt is basically a nonevent and the less-bad or not-so-bad financial news is good enough to support the current trend. The bottom line is that there is too much money (e.g., Fed dollars, corporate cash) chasing to few sellers. On even the slightest price correction, buyers are stepping in and pushing prices higher. Eventually the trend will change, but the market will decide when that will happen â€“ until then we need to trade what we see, not what we think the market is supposed to do.
DIA Position Update
DIA closed $1120.69 on Friday â€“ the February position is approx. $1,200 the red
DIA is priced 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 also 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 neutral (See DIA chart)
The January 20th Couch Potato published a February expiration month call spread
This spread is approx. $1,200 in the red (see tables below)
$120 strike price short call delta is .6161 (39% probability this position will be profitable)
DIA Risk Analysis
The DIA price is above the $120 short call and we expect to exit the trade in the next day or so. Per our exit plan below we are close to the trigger point for getting out of the trade, but there are signs that prices could pull back a bit. We have time to wait until the trigger point is actually hit, this we give us a chance to see if prices will finally drop.
The rules for exiting the DIA call spread are:
Anytime the market maker is willing to accept a limit price of less than .11 on our short strike, 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 our short strike is penetrated (closing price above our short call) AND after market close, if the delta associated with the short strike is .65 or higher, we will look to close out this spread (buy the short contracts, sell the long) and roll it out to higher short strike price.
On Monday the Couch Potato published a DIA put spread trade to set up a DIA iron condor. Unfortunately the market did not cooperate as prices gapped up the next morning and the published trade was not available. As indicated in the DIA chart above, since the beginning of December, bull put spread setups that fit our ordering rules have been few and far between. Stocks have been teasing us by signaling a chance to do a bull put spread, then prices gap up when we are ready to pull the trigger and execute the trade. The RSI indicator in the chart above confirms that the DOW index has basically been overbought for most the year. Eventually prices will correct, but an overbought rally can continue indefinitely. At this point we need to continue to monitor prices for a put spread that we feel comfortable with, and then pull the trigger as soon as we get a good entry price. But, it is not worth to the risk to become impatient and overanxious as that is a recipe for disaster. A stampede to the downside is considerably more difficult to manage compared to an upside breakout.
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.