Investors took a breather today as market followers took time to digest Fed Chairman Ben Bernanke's comments to a congressional committee. The pause provided the opportunity to complete the SPY iron condor set-up. We may have further selling pressure early tomorrow due to CISCO shares sinking in after-hours-trading because of disappointing earrnings.
SPY Position Update
SPY closed $132.27 on Wednesday
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 February 7th Couch Potato published a March expiration month call spread
The February 7th Couch Potato also published a March expiration month put spread
The published put spread was not available the next day (Tuesday), but we went after the trade again today and got our entry price
Note in the 15 minute chart below that after the first hour of trading the price pulled back. After prices dropped we entered a limit order for the .50 credit amount. The order was not filled until later in the day when prices dropped further. Readers who want to do the put spread can try a similar strategy. If we get a serious price correction during the day you can probably enter an order for a lot better price than the amount above.
As confirmed in the daily chart above the SPY has not had a downtrend since November. At this point, intraday activity is the best chance to open a put spread that fits our ordering rules.
SPY Risk Analysis
The trend is up until we get a sentiment change. The most probable risk is that the unrelenting bull leg continues and threatens our $135 short call.
As with initiating the trade, the decision process for exiting our SPY Iron Condor position will be simple:
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 or below the short put) AND the delta rises to .65 we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price. Unless this is option expiration week, do not panic and rush to close the trade, many times the market will reverse itself and remove the sense of urgency. If one of our short strikes has been violated and there is no price reversal, we cut our losses and live to fight another day.
The February 7th Final Comment section mentioned "... As mentioned we probably will need to do separate orders for the calls and puts to get an acceptable credit for the put spread. The credit amount in the bull put spread table above is the minimum we need to accept at this point (there is a lot of time left before March expiration to try again if we can't get a good price). If prices surge again on Tuesday the put spread will probably not be available...But if prices pull back any time during the day we should have a chance to get the credit we want from the put spread..." Occasionally we need to tweak the trading plan to better manage risk given the current market environment.
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.