Market Summary
Last week the U.S. Labor Department reported that new claims for state unemployment benefits unexpectedly tumbled last week to their lowest level since the beginning of the year, as anticipated layoffs in the automobile industry failed to materialize as much as the government expected. But continuing claims hit a record high and are more than double the level during the same period in the prior year. The data suggest there may be a rough road ahead for U.S. workers that have seen job prospects dry up due to the economic downturn. Weekly figures tend to be quite volatile this time of year as the government attempts to predict the timing of annual plant layoffs, leading to erratic swings in the seasonally-adjusted data that could be reversed in coming weeks.

The American Bankers Association (ABA) issued a report indicating that rising unemployment is increasingly pushing strapped borrowers over the edge, with delinquencies on home-equity loans reaching a record, and balances on delinquent credit cards surging. Higher delinquencies, fueled by rising unemployment and the economic slump, force companies to squirrel away capital to reserve for potential losses; ultimately, companies must write off loans if customers can't pay up. "The number one driver of delinquencies is job loss," said James Chessen, chief economist at the American Bankers Association. "When people lose their jobs, they can't pay their bills. Delinquencies won't improve until companies start hiring again and we see a significant economic turnaround."

Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday July 10th. This position has been open for 25 days:
The entire position is $1,158 in the black
SPY closed at $87.96 down 1.9% for the week
30-day historical volatility is 20.77%; implied volatility is 27.37%
SPY is treading EVEN with its 200-day simple moving average
SPY is trading BELOW its 50-day simple moving average, 20-day EMA and 20-day Bollinger Band SMAsee SPY chart below
Relative Strength Indicator (RSI) is bearish See Spy chart
Moving Average Convergence/Divergence (MACD) indicator is bearish See Spy chart below

The July option series expires this coming Friday and we need to start evaluating alternatives for opening an August expiration month Iron Condor position. Our objective is to satisfy our primary trade criterion - generate a minimum .55 net credit on the spread between the short and long strikes AND the short strikes should fit our statistical probability profile (80% chance all the options will expire worthless)!

We want the Bear Call spread short strike to exceed defined resistance levels :
$95 calculated based on previous closing highs and technical resistance levels
$95 is the upper price level of our 80% statistical probability range
$96.14 is the upper level of the Bollinger Band – Solid purple line in the SPY chart below

The Bull Put spread short strike price should be below defined support levels :
$87 calculated based on previous closing lows and technical support levels
$80 is the lower price level of our 80% statistical probability range
$87.40 is the lower Bollinger Band level – Solid purple line in the SPY chart below

Bear Call Spread
We initiated the SPY Iron Condor trade on June 15th and closed out the Bear Call spread at $1,140 profit on June 22nd (see tables below)

Bull Put Spread
This spread took a hit the past few weeks because of the market downturn, but the position is still basically at breakeven (see tables below)
$86 strike price short put delta is -.2799 (72% probability this trade will be profitable)

Risk Analysis
When we initiated the July Iron Condor trade there was a short-to-intermediate term up trending market environment. But the situation has reversed and now we are in a confirmed short-to-medium term downtrend. There is clearly bearish bias from both a technical and fundamental perspective. Recently some traders have been prognosticating about the possible impact of a head and shoulders pattern that has formed on the SPY chart and is considered a bear market indicator. And folks have probably are hearing discussion related to Fibonacci retracement levels associated with the major indices' gains from their March lows to June highs. None of these technical indicators is a panacea but many traders use these tools to identify potential support areas. The point is that whatever is one's opinion of the effectiveness of these tools it is useful to be aware of where other traders might view market support and resistance. Some traders are calculating SPY long-term support to be around $81 based on Fibonacci retracement levels and the head and shoulders chart pattern.

Maybe the most telling indicator of the probable direction of the SPY is the 5 distribution days in recent weeks. Sell offs on higher volume signal selling by institutional investors. Volume is a reliable technical indicator because it signals what the big money managers are doing and represents over half of the market volume on a given day. Unlike moving averages and oscillators, which are lagging indicators, volume is a leading indicator. The SPY has been contained in a relatively narrow trading range for a few months and the benefit for us is that premium is eroding from our sold options (money we hope to be able to keep).

Since we closed out our short $100 strike call, the only risk we have to manage is the $86 strike price sold put. Hopefully we will get a dead-cat bounce this week – a counter trend market upturn that will give the short put some breathing room. The risk associated with the sold put will be evaluated and resolved based on the Exit Plan below.

Exit Plan
The rules for exiting the Bull Put spread are:

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 can hold out for a .05 bid.

If the short put strike price is penetrated (closing price below the short put) OR the delta rises to .50 we will look to close out this spread (buy the short contracts, sell the long). We can expect that the overall Iron Condor trade will still be profitable.

On option expiration day, if rules 1 and 2 above have not been activated, let the Bull Put spread expire worthless and we keep the entire sold premium for any open contracts where the short strikes are not threatened.

We initiated the SPY Iron Condor as one order with four legs. The Bear Call spread has already been closed. The Bull Put spread will be closed out as a separate order following the Exit Rules described above.

Final comment

We still have 7 days until the July option expiration date and the market can be erratic during expiration week. At this point the focus is to monitor the risk to our open position; follow the exit rules to close-out this spread, and start doing analysis to prepare for the next trade.

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.