Market Summary
The past few weeks wild ride on Wall Street should serve as a stark reminder that the market never fails to behave like most people don't expect. Heading in the early July 2nd quarter earning season the perception was that the year long range-bound trading would continue with maybe a revisit of the recent highs. U.S. and global economic data had been troublesome all year, but investors seemed unperturbed by potential world-wide financial concerns as stock prices held firm. Then all of sudden it seems like the melodrama over the U.S. debt ceiling negotiations forced investors to take a closer look at the world-wide financial situation, and they decided they did not like what they saw. Now stocks are in full fledged correction mode with pundits speculating on when prices will bottom out. The recent price slide was certainly sudden and dramatic, catching even hard core bears off guard – nobody can really predict this type of action. But we are nowhere near the 2009 market low (not yet anyway). And just as easily as market sentiment turned sour a few weeks ago it can change course and turn suddenly bullish – it happens all the time. Trading can be a very emotional experience, but it helps to look at the big picture to keep things in perspective.

SPY Position Update
SPY closed $118.12 on Friday - the August position is approx. $3,500 in the red
SPY is priced BELOW at its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW its 20-day Bollinger Band SMA (see SPY chart)
SPY is just BELOW its 50-day simple moving average (see SPY chart)
SPY is BELOW its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)

The July 5th Couch Potato published an August expiration month bear call spread
On August 1st the Couch Potato suggested closing out the short calls for an approx. $1,300 gain (see tables below)

The August 11th Couch Potato suggested an August expiration month bear call spread (see tables below) . This trade was not available as published - if prices continue to recover we may be able to execute a trade on Monday.

The July 5th Couch Potato published an August expiration month bull put spread
On August 11th the Couch Potato suggested closing out the put spread for an approx. $6,000 loss (see tables below)

The August 11th Couch Potato suggested an August expiration month bull put spread (see tables below)

SPY Risk Analysis
The stock charts suggest a near term bottom, or at least a pause before a next down move. We had to close out the original put spread and decided to roll down the position to lower strikes in an attempt to mitigate the loss. If prices head south again the trade adjustment will be at risk.

DIA Position Update ---------------------------------------------------------------
DIA closed at $112.80 on Friday - the August position is approx. $3,500 in the red
DIA is priced BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading BELOW its 20-day Bollinger Band SMA (see DIA chart down below)
DIA is BELOW its 50-day simple moving average (see DIA chart)
DIA is BELOW its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)

The July 12th Couch Potato published an August expiration month DIA bear call spread
On August 2nd the Couch Potato suggested closing out the entire call spread for an approx. $1,700 gain (see tables below)

Similar to the SPY above, the August 11th Couch Potato suggested an August expiration month DIA bear call spread (see tables below) . This trade was not available as published - if prices continue to recover we may be able to execute a trade on Monday.

The July 27th Couch Potato published an August expiration month DIA bull put spread
On August 11th the Couch Potato suggested closing out the put spread for an approx. $6,400 loss (see tables below)

The August 11th Couch Potato suggested an August expiration month DIA bull put spread (see tables below)

DIA Risk Analysis
Similar to the SPY above, the DIA chart suggest a near term bottom. We had to close out the original put spread and decided to roll down the position to lower strikes in an attempt to mitigate the loss. If prices head south again the trade adjustment will be at risk.

Exit Plan
August options expire this Friday and if either the SPY or DIA short put strikes are breached we will probably need to exit the position(s). Even if prices don't drop below our short put strikes, unless stocks rebound strongly next week it will probably be prudent to close out any open positions.

Final Comment
For most of the year the major stock indexes basically traded range-bound. In the past we discussed how range-bound trading is the ideal environment for market neutral trading strategies similar to iron condor trades. No one expected range-bound trading to last indefinitely and over the past few weeks we have experienced probably the worst environment for trading bearish credit spreads. Sudden, triple-digit moves that happen after a trade is already in play can make it very difficult to manage a market neutral position. The name of the game if the market turns against you is discipline. All traders lose money at some point and it helps to have the discipline to stick to your trading plan, adhere to the exit rules, and try not to get emotional. Similar to the flash crash from May of last year, the current crisis will pass and we want to stay in the game to benefit when the dust settles.

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.