What a difference a week makes as a few weeks ago the major indexes peaked through the bottom of their two-month trading ranges and made new 52-week lows. The indexes biggest weekly gain in several years has suddenly catapulted prices to the top of their trading ranges. Similar to the scenario when prices where at the lows, we need to see if buyers can follow through and drive prices through the top of the trading range or will sellers seize the opportunity to sell shares and contain prices. From a technical perspective there is certainly room for prices to continue higher as evidenced in the stock charts below, prices are not yet overbought. And fundamentally, stocks could easily go higher as one-third of the DOW Component stocks report next week including sentimental favorite Apple. One concern is that the recent gains have come on relatively low volume. Recent higher volume trading days have been bearish which suggest that a few bearish distribution days could bring prices back down again.
The VIX volatility gauge has declined in the past few weeks to the lowest levels since the beginning of August. This should translate into less fear and skepticism about stock prices and make it a little easier to trade credit spreads. Normally as uncertainty subsides and the VIX declines the premium on sold options decreases â€“ which is what we want to happen with our credit spreads since they were sold at higher prices. We still need be very careful with entering our spread positions as daily triple digit moves are still happening and though the VIX has pulled back, it is still at a relatively high level. Considering the recent erratic up and down price fluctuations our trades appear to be in good shape as prices have remained in the aforementioned trading range and the major indexes probably have established a bottom for the near term. We discussed in the past how the top priority when attempting to profit from credit spreads in a high volatility environment is properly setting up and entering the trade. This is true with any trade but there is added emphasis with credit spreads as the high volatility can easily be the bane of these types of trades if you are not careful.
SPY Position Update
SPY closed $122.57 on Friday â€“ the October position is approx. $1,500 in the black
SPY is priced ABOVE 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 ABOVE 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 bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bullish (See SPY chart)
The September 29th Couch Potato published an October expiration SPY bull put spread
This put spread is approx. $1,500 in the black (see tables below)
$107 strike price short put delta is -.0157 (98% probability this position will be profitable)
SPY Risk Analysis
The only risk is that stock prices crash before option expiration and threaten the $107 strike price short put.
DIA Position Update ---------------------------------------------------------------
DIA closed at $116.34 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 ABOVE its 50-day simple moving average (see DIAchart)
DIA is BELOW its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bullish (See DIA chart)
The September 27th Couch Potato published an October expiration month DIA bear call spread
This call spread is approx. $400 in the black (see tables below)
$118 strike price short call delta is .2819 (72% 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. $1,400 in the black (see tables below)
$102 strike price short put delta is -.0155 (92 % probability this position will be profitable)
DIA Risk Analysis
If stocks prices extend its weekly gains the $118 strike price short call might be threatened prior to expiration next Friday.
The exit rule for the SPY and DIA put spread has been triggered and we expect to exit those positions over next few days.
We need to monitor the DIA call spread as the huge weekly gain thrust indexes to the top of their recent trading ranges. If prices break out of the trading range we will probably need to exit the call spread to avoid potential losses.
October options expire this week and at this point we need try to make sure that we can exit our positions with gains. As mentioned above, the exit rule for our SPY and DIA bull put spreads have been triggered and we expect to close out those positions with gains over the next few days. And obviously we need to keep an eye on the DIA bear call spread as all of a sudden the index is pressing up against near term resistance and if it breaks through we will need to make decision about our short call. Also note that the October 9th Couch Potato Final Comment mentioned "... 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..." This weeks price action can be considered exhibit 'A' for honoring trading rules as a call spread would have been a bad trade that would have jeopardized our currently profitable position.
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.