Market Summary
As indicated in the SPY ETF daily chart below, the S&P 500 index is bumping into resistance at multi-year highs. The chart also confirms the index has been extremely overbought since the middle of January. Overbought levels can last for a while but eventually this condition will have to be resolved by the price either moving laterally or downward. The S&P 500 index might be starting to struggle to move much higher and now might be a good opportunity to set up a March SPY call spread.

Gold prices crashed to start the week in reaction to news of a possible coordinated attempt to avert a currency war among the Group of Seven nations (G-7). Generally, gold trades inversely to the direction of the greenback and a stronger dollar can influence the appeal of precious metals to holders of other currencies. Also, light trading volumes in the Asian markets due to the Lunar New Year holiday also put pressure on precious metals. As seen in the GLD ETF chart below, despite the drop to start the week prices held up within the trading range that has been in place since the middle of December. Now may be the time to take advantage of the opportunity to set up a March GLD put spread.

SPY ETF Trade Setup
We are opening a March expiration month SPY bear call spread

We want the SPY call spread to generate a minimum .50 net credit AND we prefer an 80% probability that the short call contracts will expire worthless and we get to keep most of the sold premium. The spread in the table below complies with our trading rules for initiating the March expiration month option series SPY bear call spread (based on Tuesday's closing prices). The suggestion is to submit an order to purchase/sell the option strikes prices below. Please confirm the correct option symbols with your broker.

If prices gap down tomorrow the call spread may not be available as published and we will hold off on this trade. Conversely if prices rise sharply then we will probably initiate the call spread at a higher strike price with a similar risk profile.

Premium Credit $.51
Total Option Premium Received $1,020 (Excludes commissions and fees)
Maximum Risk $8,980
Margin Requirement $10,000
20 contracts traded on each leg (number of contracts can be increased or decreased based on risk tolerance and/or funds available to trade; this will impact Total Premium Received, Maximum Risk amount, and Margin Required)

GLD ETF Trade Setup ---------------------------------------------------------
We are opening a March expiration month GLD bull put spread

We want the GLD put spread to generate a minimum .50 net credit AND we prefer an 80% probability that the short put contracts will expire worthless and we get to keep most of the sold premium. The spread in the table below complies with our trading rules for initiating the March expiration month option series GLD bull put spread (based on Tuesday's closing prices). The suggestion is to submit an order to purchase/sell the option strikes prices below. Please confirm the correct option symbols with your broker.

If prices gap up tomorrow the put spread may not be available as published and unless the gap is filled we will hold off on the trade. Conversely if prices drop sharply then we will probably initiate the put spread at a lower strike prices with a similar risk profile as described above.

Premium Credit $.59
Total Option Premium Received $1,180 (Excludes commissions and fees)
Maximum Risk $8,820
Margin Requirement $10,000
20 contracts traded on each leg (number of contracts can be increased or decreased based on risk tolerance and/or funds available to trade; this will impact Total Premium Received, Maximum Risk amount, and Margin Required)

Exit Plan
As with initiating the trade, the decision process for exiting our credit spreads will be simple:

Anytime the market maker is willing to accept a limit price of less than .10 on one of our short strikes, we can buy back all the short contracts and sell the long positions on the same spread. However, if it is a week or so prior to the expiration date, we may be able to hold out for a .05 bid or lower.

If one of our short strikes is penetrated (closing price above a 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.

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.