The May 8th Couch Potato Market Summary mentioned "... At this point the best bet is range-bound trading...the price stalled at resistance turned down steadily, resting at near term support. Also looking at the daily chart down below, you can see...volume has been relatively higher on down days..."
This analysis is still valid as over the past week the major indexes have been in a tight trading range. May options expire next Friday and it is not unreasonable to expect the current resistance and support levels to hold.
More analysts are starting to take the position that stocks are set up for a fall. Higher volume on down day and declines in oil and metals prices are being seen by an increasing number of fund managers and strategists as a signal to get out of riskier areas of the equity market. Traders probably had already priced in the robust first quarter earnings with three-quarters of the S&P 500 companies beating estimates. As the Fed begins to wind down the quantitative easing program, the question is whether the economy is strong enough to stand on its own? We are hearing about the worsening finances of Medicare and Social Security, the expanding European financial crisis, and U.S. inflation hitting a 2-1/2-year high in April, not to mention congress impending battle over raising the debt ceiling. This economic uncertainty may suggest near-term range bound trading. Generally, the summer months are less volatile anyway and the current sentiment may bode well for market neutral trading strategies. Last summer, the market traded range-bound and we had good results with our trading, hopefully the stock prices will cooperate again this year.
SPY Position Update
SPY closed $134.04 on Friday - the May position is approx. $700 in the black
SPY is priced just BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading just BELOW 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 turning down (See SPY chart)
The April 20th Couch Potato published a May expiration month call spread
This call spread is approx. $700 in the black (see tables below)
$136 strike price short call delta is .2150 (78% probability this position will be profitable)
SPY Risk Analysis
The $136 resistance level is still holding, but May options expire this Friday. We need to be prepared to quickly adjust the call spread if the SPY price turns up over the next few days. Even if the price does not suddenly move higher, the best move is to exit the position as early as possible to try to avoid a late disaster.
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.
As mentioned above, May options expire this Friday. Unless we have to adjust the call spread, we will not get a chance to do another May trade. Obviously, the ideal situation is to already have another trade(s) in place to hedge the SPY call spread â€“ but we did not have the opportunity to do another trade, therefore we will be putting a short leash on our open position to minimize the risk.
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.