The major index Exchange Traded Funds (ETFs) posted their first weekly gains in more than three weeks as healthy earnings news lifted Wall Street. Strong earnings reports from blue chip companies lifted stocks across board. High unemployment claims are still a drag on the market as the stronger earnings results were tempered by a weaker-than-expected job market report. Trading volume was anemic due to the holiday-shortened-week as many traders started vacationing on Wednesday. Next week could be interesting as we will have an earning blitz with 180 of the S&P 500 companies set to report earnings. Of the companies that have reported already reported, 75% have exceeded analysts' expectations. That is just above the average over the last four quarters but above the average of 62 percent since 1994, according to Thomson Reuters data.
Also, lest we forget, the two-day Federal Reserve Open Market Committee meeting begins Tuesday. Adding to the suspense this time around is the first of Big Ben Bernanke's press conferences after the meetings wrap up. Presumably, the press will have an opportunity to ask follow questions and dissect the FMOC policy statement. We would be surprised if anything unexpected is articulated during the Fed meeting or press conference afterwards, but you can never tell how traders will react to what they hear.
There will likely be questions raised about the type of monetary policy the Fed will pursue when QE2 draws to a close at the end of June. The Fed will probably continue purchasing securities using the funds from maturing notes they currently hold, sort of like a QE-light. Technically, the economy is in recovery mode (except for the millions without jobs) and the Fed does not have to be as creative to stimulate the economy compared to the beginning of the recession.
As displayed in the SPY chart below, stocks have basically traded range-bound since the beginning of March. Investors reacted to the Japanese tsunami and Libyan unrest, but after they got past those episodes they bid prices back up into the trading range. We will probably get nominal 'new highs' as indexes probe above resistance levels, but there will be price pullbacks as traders sell equities to rotate into commodities. This is the scenario that we prefer for our trading strategy â€“ incremental price advances/declines within a trading range to allow us the opportunity to execute both call and put credit spreads.
SPY Position Update
SPY closed $133.78 on Thursday
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 well 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 neutral (See SPY chart)
The April 20th Couch Potato published a May expiration month call spread
SPY Risk Analysis
Until we have an opportunity to do a put spread, the only risk is the SPY price pushing higher and threatening the $136 short strike.
As with initiating the trade, the decision process for exiting the bear call spread 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 the short call) AND the delta rises to .65 we will look to close out this spread (buy back 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 said "... As mentioned we probably will need to do separate orders for the calls and puts to get an acceptable credit for the put spread...(there is a lot of time left before ... expiration to try again if we can't get a good price). If prices surge again ... the put spread will probably not be available...The April 19th Couch Potato published a SPY bull put spread, but prices gapped up the following day and the trade was not available. Instead the price action dictated that a bear call spread was the best move per our trading plan. There is still a lot of time left prior to May option expiration and we expect there will be another opportunity to complete the SPY iron condor with the put spread. We just prefer to be extra careful with doing put spreads because generally, it is considered more difficult to adjust those trades compared to the call side.
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.