The major indexes ended the week lower as uncertainty and confusion roiled the markets. The week started with Fed Chairman Ben Bernanke's semi-annual testimony to congress. He continued to signal that the Federal Reserve does not have a grasp on where the economy is headed or a clear plan for dealing with future contingencies. Investors did not like what they heard and stocks immediately tanked. Mr. Bernanke attempted to appease the market with follow-up comments, but investors did not appear to be impressed. And of course there is the ongoing tussle between the White House and congress over meeting the August 2nd deadline for raising the debt ceiling. The debt ceiling issue will have to be resolved, but however the final deal is negotiated you can pretty much bet that most of the pain and sacrifice will be borne by middle class Americans â€“ the Republicans are dead set on protecting wealthy business interest and Democrats are looking after folks in the lower social-economic stratum. Middle class Americans really miss and need an independent political voice ala Ross Perot to fight for them. In fact the Thomson Reuters/University of Michigan survey showed consumer sentiment unraveling last month to its lowest reading since March 2009.
What appears to be holding stock prices up at this point is earnings, as Google led the charge with blockbuster numbers. Ten of the thirteen S&P 500 companies that reported earning so far topped expectations. Next week the pace of earnings announcement gets serious as Apple, Ebay, IBM, Microsoft, Morgan Stanley, Caterpillar are among the companies scheduled to report. The upcoming weeks may provide a clear sign on whether the global economic headlines will continue to mitigate the boost from probable stellar company revenue and earnings data.
The SPY weekly chart below will confirm that basically the major indexes have settled in trading range for most of the year. The SPY is trading between the April high and the March low. And most of the momentum indicators and oscillators (RSI, MACD, etc.) are flashing market neutral trading signals. For our trading strategy we obviously prefer that this trend continues as range-bound trading is the ideal environment for market neutral positions. Our current trades were set up well, but there is still a lot of time left prior to August option expiration and as proven over and over again, the market tends to do what most people don't expect. This is why we prefer to trade what see and take what the market is giving right now, versus betting on where prices will be in the future.
SPY Position Update
SPY closed $131.69 on Friday - the April position is approx. $500 in the black
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 just ABOVE its 50-day simple moving average (see SPY chart)
SPY is 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 July 5th Couch Potato published an August expiration month bear call spread
This call spread is approx. $800 in the black (see tables below)
$138 strike price short call delta is .1358 (86% probability this position will be profitable)
The July 5th Couch Potato published an August expiration month bull put spread
This put spread is approx. $350 in the red (see tables below)
$128 strike price short put delta is -.3049 (70% probability this position will be profitable)
SPY Risk Analysis
The SPY is in a near-term downtrend and at this point the most probable risk is a continued pullback threatens the $128 strike price short put.
DIA Position Update ---------------------------------------------------------------
DIA closed at $124.56 on Friday - the April position is $300 in the black
DIA is priced ABOVE its current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE its 20-day Bollinger Band SMA (see DIA chart down below)
DIA is ABOVE its 50-day simple moving average (see DIA chart)
DIA is well ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is neutral (See DIA chart)
The July 12th Couch Potato published an August expiration month DIA bear call spread
This put spread is approx. $300 in the black (see tables below)
$128 strike price short call delta is -.2580 (74% probability this position will be profitable)
DIA Risk Analysis
The DIA price gapped up and did not present the opportunity to open the bull put spread side of the iron condor â€“ therefore the only risk is prices going higher and threatening the $128 strike price short call.
As with initiating the trade, the decision process for exiting our SPY and DIA spreads 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.
Exiting this position prior to expiration we will probably â€œleg outâ€ of each trade by first unwinding either the bear call spread or the bull put spread; and close out the other side of the spread as a separate order. The timing of closing out each side of the Iron Condor is dependent on following our Exit Rules described above.
Taking a look at expanded Bollinger bands in the charts above will confirm increased trading volatility and in fact, implied volatility (representing the expected volatility of a stock over the life of the option) has been increasing over the past few weeks. The basic premise is that the current higher volatility environment is optimum for doing option credit spreads, the trick is to be patient and wait on a low risk entry point before initiating the trade. Recently stocks have been making triple digit moves up and down depending on how traders interpret the day's economic news. If the current range-bound high volatility trend continues we should have the opportunity to do more low-risk higher premium generating trades.
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.