The May 20th Couch Potato Market Summary mentioned "... the RSI (Relative Strength Indicator) is flashing extremely oversold levels. Typically, from a technical analysis point-of-view one would expect a price recovery from being oversold...what might be disconcerting to many technical analysts is how extreme stocks are oversold â€“ this might suggest that stocks down-slide may linger longer than expected. For example, look at daily S&P 500 Index chart right below and notice how last August was the last time the index was as oversold as is now. Also, observe how it took several months of fluctuating prices for stocks to finally crawl off the bottom and recover..."
Below is the updated S&P 500 Index daily chart. Similar to what happened last August when stocks were extremely oversold, prices are settling near a support level. As noted in the chart, for the S&P 500, its 200-day SMA intersects the lower Bollinger band and appears to be acting as firm support. And there is significant overhead resistance which suggests that similar to last August, prices can be expected to trade range bound for awhile. The current price pause is basically just alleviating oversold conditions. We will probably get a 'dead cat' bounce here and there, but it is reasonable to expect further downward pressure before prices move much higher.
SPY Position Update
SPY closed at $132.10 on Friday â€“ the May iron condor closed approx. $700 in the red
SPY is priced BELOW 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 priced BELOW its 50-day simple moving average (see SPY chart)
SPY is ABOVE 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 May 15th Couch Potato published a June expiration SPY bull put spread
The put spread is approx. at breakeven (see tables below)
$126 strike price short put delta is .1995 (80% probability this position will be profitable)
The April 18th Couch Potato published a May expiration SPY bear call spread
On May 7th we suggested immediately closing out the call spread for an approx. $1,000 gain (see tables below)
The April 18th Couch Potato published a May expiration SPY bull put spread
On May 17th the Couch Potato published a put spread trade adjustment rolling the $133 short put down to the one-week May 25th expiration $127 strike price and increasing the number of contracts
The adjusted put spread expired at May expiration and the put spreads closed approx. $1,700 in the red (see tables below)
SPY Risk Analysis
We have not had the opportunity to open a June call spread, therefore the only risk is prices continuing to drop and threatening the June $126 strike price short put.
TLT Position Update ---------------------------------------------------------
TLT closed at $123.40 on Friday
TLT is priced ABOVE its current 14-day EMA (see TLT chart down below)
TLT is trading ABOVE its 20-day Bollinger Band SMA (see TLT chart)
TLT is priced ABOVE its 50-day simple moving average (see TLT chart)
TLT is ABOVE its 200-day simple moving average (see TLT chart)
Relative Strength Indicator (RSI) is overbought (See TLT chart)
Moving Average Convergence/Divergence (MACD) is bullish (See TLT chart)
The May 22nd Couch Potato published a June expiration TLT bear call spread. The article also mentioned executing the trade at higher strikes if bond prices gapped higher the next morning which is what happened. (see tables below)
TLT Risk Analysis
The risk is an overflow of funds plowing into U.S. Treasury bonds pushing prices higher and threatening our $128 strike price short call.
As with initiating the trade, the decision process for exiting our June SPY put spread and/or TLT call spread 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 the TLT short call or below the SPY 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.
As mentioned above, the May 22nd Couch Potato Final published a June expiration 20+ Year Treasury Bond Fund ETF (TLT) bear call spread. The article displayed a $126 strike price short call and noted "... if prices rise sharply then we will probably initiate the call spread at higher strike prices with a similar risk profile as described..." As confirmed in the TLT 30 min. chart below, bond prices gapped higher after the first hour of trading the following morning. This may have worked out beautifully for us as the TLT intraday price rose back up to recent highs and enabled us to execute the trade with the same risk/reward profile at a higher $128 short strike price. The published trade suggested a $126 short strike partly based on the fact that the TLT 52-week high is $125.03 and this price is acting as very firm resistance. If the trade was good at a $126 short strike price, then it may be a great trade at a $128 strike. If the question is why not take the higher credit that was available at a $126 strike or even $127, the answer is that we have been relatively successful because our priority is managing risk. There is a reason why the credit is higher at the lower strike prices â€“ the risk is greater. Keep in mind that with the current higher volatility, doing simultaneous call and put spreads for an iron condor position is problematic, therefore managing risk for whatever trade is available has to be job one.
If this were an intraday service, the best trade probably would have been an intraday alert suggesting a TLT calendar spread taking advantage of the elevated near-term premium. For example, maybe selling the June $127 call and buying the July $133. As June expiration approached rolling up the June $127 call to a July call might be a low risk opportunity to realize higher profits compared to two separate monthly call spreads. These low-risk higher profit setups occur infrequently and you need to be able to recognize and move on them when the opportunity is there.
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.