Market Summary
Stocks are in full-fledged correction mode as the Dow, S&P 500 and NASDAQ each lost more than 12% this quarter, the first time that's happened since the financial crisis peaked at the end of 2008. The S&P 500 index has lost 14.3% since the start of the third quarter on July, 1st. That's the biggest quarterly drop since the three months ended Dec. 31, 2008, when global financial markets seized up. Excluding that period, the S&P has not dropped that much in a quarter for nine years.

The September 25th Couch Potato opined "... The trend is undeniably bearish and ... a breakout below the current trading range would be the most probable trend change. The other alternative is upside breakout which certainly could happen, but which would be unexpected and surprise most folks if it happened any time soon..." This analysis is still valid as the stock charts below confirm that the major indexes remain in the trading ranged established at the beginning of August. Thus far, recent support levels have held firm, but with the investment funds end-of-quarter window dressing just completed and the start of earnings season in a few weeks, momentum will probably change one way or the other.

SPY Position Update
SPY closed $113.15 on Friday – the September position expired with an approx. $1,300 gain
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 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 September 29th Couch Potato published an October expiration SPY bull put spread with the caveat "... If stock prices drop tomorrow ...will probably initiate the put spread at lower strike prices with a similar risk profile as described above..." The actual lower strike price trade is in the tables below.

SPY Risk Analysis
We have not had a chance to open a call spread, therefore the only risk is that prices break down further and threaten the $107 strike price short put.

DIA Position Update ---------------------------------------------------------------
DIA closed at $108.93 on Friday - the October position is approx. $500 in the black
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 and 200-day simple moving averages (see DIA chart)
Relative Strength Indicator (RSI) is bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)

The September 27th Couch Potato published an October expiration month DIA bear call spread
This call spread is approx. $700 in the black (see tables below)
$118 strike price short call delta is .1238 (88% probability this position will be profitable)

The September 13th Couch Potato published an October expiration month DIA bull put spread
This put spread is approx. $200 in the red (see tables below)
$102 strike price short put delta is -.2521 (75% probability this position will be profitable)

DIA Risk Analysis
Although the recent support level has thus far held the major indexes in a trading range, the longer term trend is bearish. If the bearish trend continues and prices break below support the $102 strike price short put will be at risk.

Exit Plan
As with initiating the trade, the decision process for exiting our SPY and DIA spread positions 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 “leg out” 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.

Final Comment
Regular Couch Potato subscribers have probably noted that we have started suggesting flexibility with entering spread positions. In the past we have discussed how occasionally we need to tweak our trading plan to account for the markets' current temperament. The Dow Jones industrial average swung more than 100 points in more than half of the trading days this quarter. Since August, the VIX has fluctuated violently between the relative highs of 30 and 45. We prefer to go with the flow and attempt to initiate call spreads when prices approach resistance levels and/or do the put spread when prices are at the lowest point. This strategy adds another layer of security when executing credit spreads as attempting to profit from initiating a four-legged market neutral trade (iron condor, butterfly, etc.) is a hard nut to crack in the current trading environment.

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.