Market Summary
A lot of folks in the bear market camp are probably pulling their hair out waiting on the price correction predicted by many market prognosticators. From a technical analysis perspective, the major indexes have been in overbought territory for most of the year with relatively light trading volume. Most of the economic data, earnings news, etc. has generally been mixed, but even when bad news dominates the headlines sellers mostly stay on the sidelines. Every time the bears even begin to start a downtrend the bulls use the dips as buying opportunities to squeeze the shorts. The historic stock market crash of fall 2007 apparently is still vividly etched in investors' memory and the mini crash/flash crash of last spring further damaged investor psyche. Plus a lot of retail investors don't necessarily understand the dynamics of the market and mistaking assume that the stagnant job market limits how high stock prices can go.

Regardless of the chart signals, or what the talking heads proclaim in the media, there is no lid on stock prices. Remember that not that long ago the DOW reached its all-time high of 14,164 and 1,565 for the S&P 500. Of course the stock market crashed shortly after reaching these levels, but prices have recovered most of those losses in a relatively short amount of time. We are not yet hearing market pundits proclaim that a return to all-time highs is imminent, but a lot of market action happened in the past few years that virtually no one expected (e.g. market crash after reaching all-time highs, bear market low in early 2009, and almost doubling in stock price in only few years, etc.) The fact is that most people are wrong about what they expect will happen in the stock market and there certainly is not any reason prices can't continue higher. And of course we can have a price correction at any time, but we shouldn't worry about that. The point is that our trading strategy is to take what the market gives us. Stocks are going to do whatever they want, we just need to remain disciplined and go with the flow.

SPY Position Update
SPY closed $133.11 on Friday
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 February 7th Couch Potato published a March expiration month call spread

The February 7th Couch Potato published a March expiration month put spread

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.

Exit Plan
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.

Final Comment
The February 9th Couch Potato mentioned a minor tweak to the trading plan to be able open the bull put spread. For the summer of 2010 stocks traded range-bound and legging into call spreads at resistance and put spreads at support was profitable. In the fall, prices began the current upward ascent with not many down weeks. This trend change was problematic for us because it limited opportunities to open low risk put spreads, and the upward move pressured the short call strike price without benefit of a hedge from the puts. No trading strategy works in every market environment; therefore we made adjustments to account for the current trend. The February 9th article discussed using intraday signals to get a put spread that fit our risk/reward profile. An iron condor is inherently a hedged stock position, and we needed to make the necessary adjustment to better manage the trade risk.

Gregory Clay

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.