Market Summary
And the beat goes on as the bears anxiously wait on a trend change. But in a continuation of market behavior that began the end of last year, the bulls lay in wait, and every time there is even the slightest price pull back, they charge in and bid up shares. Obviously the current mood of investors is to rejoice over positive economic data while viewing negative financial news as not-that-bad. All trends change – eventually. The current upward trend is set up for a nice run as the funding provided by the Federal Reserve and institutional investors sitting on wads of cash is providing plenty of liquidity to drive prices even higher. The most probable trend change is a return to range-bound trading similar to most of last summer. And of course, one day there will be another down trend. But no one knows what will be the impetus to start the next bearish leg as investors are brushing aside all manner of supposed bad news. Maybe the bulls will get exhausted when the fed's QE2 program runs its course and if the job market continues to lag. Usually it is some unforeseen event that initiates a down trend, which is why they tend to be more volatile, compared to up trends.

As confirmed in the SPY chart below, we mentioned previously that the current market has been overbought for most of the year. But we also alluded to how an overbought rally can continue indefinitely. Yes there are signs that the current uptrend is getting a little tired, but folks have also been saying that all year. The NASDAQ Composite is the first major index to approach its October 2007 pre-bear market highs. The other major indexes are much further away from their previous highs, but they are relentlessly marching toward the top. What we need to do from a trading perspective is to be prepared to pull the trigger on put spreads whenever the trade is set up properly. We will maintain discipline and not deviate from our ordering rules, but the current market is providing limited opportunities to execute low-risk put spreads; the smart move is to be ready when we get the chance.

SPY Position Update
SPY closed $134.53 on Friday - the February position is approx. $1,100 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 bullish (See SPY chart)

The February 7th Couch Potato published a March expiration month bear call spread
This call spread is approx. $1,700 in the red (see tables below)
$135 strike price short call delta is .4469 (55% probability this position will be profitable)

The February 7th Couch Potato published a March expiration month bull put spread
This put spread is approx. $600 in the black (see tables below)
$126 strike price short put delta is -.1233 (88% probability this position will be profitable)

SPY Risk Analysis
The unrelenting bullish leg that began in the first week of December is already approaching our $135 short call. Fortunately March has a quarterly option expiration series - we can roll both the call and put spreads from regular to the end-of-month expiration to attempt to keep the iron condor profitable.

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
In the past we discussed how we appreciate the quarterly calendar months because they have an options series that expires at the end-of-month in addition to the regular monthly expiration. This scenario provides the opportunity to do trade adjustments when necessary without having to roll the position out to the next calendar month (which basically converts the trade to a realized loss in the current month.) And of course, finally getting the put spread side of the iron condor in play helps considerably with managing 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.