Market Summary
Quarterly earning results ramp up next week and may provide a distraction from the ongoing episode with the European debt crisis. A lot of us believe that we have a malfunctioning government in Washington D.C. but compared to what is going on across the Atlantic and in other nations around the globe maybe our situation is not as bad as it appears? If traders interpret the upcoming earning reports positively then we should expect the major indexes to approach the highs of the recent trading range. But if investors react negatively, look out below as prices will probably continue setting new 52-week lows.

The major indexes continue to trade in the trading range that has been in place for several months. This past week prices broke through support and established new 52-week lows. But there was no follow through as buyers stepped in and pushed prices back up towards the middle of the trading range. Even though prices recovered, the break to new lows is definitely a bearish sign as it usually requires several attempts before you get a confirmed price breakout below support or above resistance levels. If prices manage to return to the highs of the trading range that should provide a certain level of confidence that prices have bottomed out in the near term.

SPY Position Update
SPY closed $115.71 on Friday – the October position is approx. $800 in the black
SPY is priced close to 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 well BELOW 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 September 29th Couch Potato published an October expiration SPY bull put spread
This put spread is approx. $800 in the black (see tables below)
$107 strike price short put delta is -.1411 (86% probability this position will be profitable)

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

DIA Position Update ---------------------------------------------------------------
DIA closed at $108.93 on Friday - the October position is approx. $1,800 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 BELOW its 50-day simple moving average (see DIAchart)
DIA is well BELOW 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 September 27th Couch Potato published an October expiration month DIA bear call spread
This call spread is approx. $900 in the black (see tables below)
$118 strike price short call delta is .1136 (89% 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. $900 in the black (see tables below)
$102 strike price short put delta is -.1155 (88 % probability this position will be profitable)

DIA Risk Analysis
The DIA is basically priced equidistant between the short call and put strikes. However the current trend is bearish and the most probable risk is a continuation of the current trend which would threaten the $102 strike price short put.

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
October options expire in a few weeks and at this point we need try to make sure that we can exit our positions with gains, or at the very least not suffer a loss if prices move drastically. We wanted to initiate a SPY call spread as a further hedge for our short put, but the market did not cooperate. Actually, the recent price recovery suggests an opportunity to do a call spread, but with only a few weeks remaining in the trading month it is probably not worth the risk.

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.