A few weeks ago the major indexes peaked through the bottom of their trading ranges that have been in place since the beginning of August and made new 52-week lows. After reaching the bottom, the indexes catapulted straight up unabated to the top of the trading ranges. Prices gapped up this past Friday finishing the day near the session highs and ending a fourth consecutive weekly gain. Earning season goes into full blast next week as hundreds of companies are due to report. If companies continue to announce relatively favorable results, upward momentum should drive prices through the top of the trading range. From a technical perspective there is certainly room for prices to continue higher as evidenced in the stock chart below, prices are not yet overbought. Unfortunately, traders remain fixated with the European debt melodrama and the constant go-no-go headlines from various parties concerning a resolution to this ongoing crisis. If prices follow through on the upside breakout the next level of resistance will be the 200-day simple moving averages. However, if the major indexes fail to clearly and decisively push higher then the bulls would in effect have expended considerable effort to do nothing more than retrace to the top of the still intact trading range.
SPY Position Update
SPY closed at $123.97 on Friday â€“ the October position finished with an approx. $1,500 gain
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 October 18th Couch Potato published a November expiration SPY bear call spread (see tables below)
SPY Risk Analysis
We have not have the opportunity to initiate a bull put spread, therefore the only risk is prices continuing to climb and threatening the $129 strike price short call.
DIA Position Update ---------------------------------------------------------------
DIA closed at $117.85 on Friday - the October position finished with an approx. $2,700 gain
As with initiating the trade, the decision process for exiting our November SPY bear call position 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 ) 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.
With four weeks to go until November option expiration there should be plenty of opportunities to do additional trades. Our current strategy for initiating credit spreads in this high volatility environment is to initiate call spreads when prices approach resistance levels and/or do the put spread when prices are at the lowest point. With the daily triple-digit price moves we need to be on the alert for a trade set-up and be prepared to pull the trigger when the opportunity presents itself.
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.