The August 28th Couch Potato Market Summary mentioned "...at this point the best bet is probably range-bound trading. As indicated in the stock chart below, for the past few weeks the major indexes have maintained a trading range and notice the Bollinger bands are starting to contract. It might be a little difficult for stock prices to take off much higher as traders have been taking every opportunity to sell into price rallies..."
This analysis is still valid as prices for the major indexes basically ended the week where they started. Stocks began the week with gains, but gave it all back at weeks end as the terrible employment numbers spooked investors. Next week should more of the same as most professional traders return from the long Labor Day weekend. Volatility is still at elevated levels, and combined with relatively light trading volume it is reasonable to expect daily triple-digit stock price fluctuations to be the norm.
DIA Position Update ---------------------------------------------------------------
DIA closed at $112.28 on Friday - the September position is approx. $2,100 in the black
DIA is priced BELOW 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 BELOW its 50-day and 200-day simple moving averages (see DIA chart)
Relative Strength Indicator (RSI) is neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is turning up (See DIA chart)
The August 31st Couch Potato published a September expiration month DIA bear call spread
This call spread is approx. $1,100 in the black (see tables below)
If the DIA price does not gap up when the market opens on Tuesday we should be able to immediately close out the bear call spread for a decent gain
The August 18th Couch Potato published a September expiration month DIA bull put spread
This put spread is approx. $1,100 in the black (see tables below)
$100.75 strike price short put delta is -.0764 (92% probability this position will be profitable)
DIA Risk Analysis
The DIA price is sitting virtually equidistant between the short strike prices for the call and put spreads â€“ even the risk profile (deltas) is virtually the same. Eventually, stock prices will favor one spread over the other, but at this point the risk is statistically the same for both.
The exit rule for the DIA call spread has already been triggered.
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.
Sometimes it is better to be lucky than good. We published the DIA call spread trade on Wednesday afternoon, however, the prices as published were only available for approximately an hour or so after the market opened on Thursday. The DIA price reached its peak Thursday morning, drifted downward as the day wore on and culminated in Friday's opening gap down and price crash.
After stocks begin trading in the morning we normally review 5, 15, and 30 minutes charts to try to get a feel for potential intraday support and resistance levels. Note the 1Sept (Thursday) activity in the 15-minute DIA chart below how the candlesticks signal the early intraday resistance level and a possible price pullback â€“ this was the sign to execute the DIA call spread. Of course, prices could have just as easily continued higher instead of going down. And the next day stocks could have gapped up instead of going south â€“ but we no control over that, we need to trade what we see.
Actually, it is probably less complicated to execute trades later in the day when support and resistance levels have already been established â€“ but with the current high volatility and triple-digit price moves you might miss some trading opportunities. Neither strategy is necessary better than the other as it obviously depends on available time, resources and trading plan. It is more important to find a technique that works for you, and stick with it understanding that you might miss some trades, but other opportunities will come your way.
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.