The May 1st Couch Potato Market Summary mentioned "... we have to see how much juice is left in the current bull move. The indexes are approaching overbought levels, plus earnings season is winding down. Investors will have to begin focusing on economic data to find the motivation to move the market...Recently; we discussed how for the past few months stocks have basically traded range-bound. Over the next week or so we will find out whether a new uptrend is confirmed or if stocks are settling into an expanded trading range..."
At this point the best bet is range-bound trading. Take a gander at the SPY 15 minute chart below, notice how the price gapped up on Friday primarily from the good news on job creation. But the price stalled at resistance turned down steadily, resting at near term support. Also looking at the daily chart down below, you can see that outside of today's price action, volume has been relatively higher on down days. We will have to see if Friday's knockout job numbers will provide renewed vigor to catapult stocks to the next bull leg.
SPY Position Update
SPY closed $134.20 on Friday - the May position is approx. at breakeven
SPY is priced right at 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 neutral (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
This call spread is approx. at breakeven (see tables below)
$136 strike price short call delta is .3084 (69% probability this position will be profitable)
SPY Risk Analysis
The May 1st Risk Analysis mentioned "... In a few days we should know whether resistance will hold and turn the price down..." Thus far, as confirmed in the charts above, the $136 resistance level has held. With several weeks to go prior to May option expiration we still anticipate doing a trade adjustment, especially if prices continue to trend upwards. Unfortunately, we did not have the opportunity to do a put spread to provide further protection.
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.
With only two weeks until May options expire, unless we have to adjust the call spread, we probably will not get a chance to do another May trade. Sometimes, the best trade is not to trade â€“ especially if the alternative is go against the ordering rules to do a riskier trade with a higher loss probability. Just like an insurance company won't write a policy for every person who walks through the door, it is absolutely critical that we manage the risk for all the trades that we do.
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.