Market Summary
In the traditional business cycle, now would be about the time for consumers to jump start the economy. Buoyed by lower interest rates and improved job prospects, in past recessions consumers have purchased homes, cars and other durable goods, creating jobs and persuading businesses to invest again. But this recession is different because consumers don't have the ability to increase their spending. They don't have the income, or the credit.

Consumers are in no position to dig the economy of a hole, until they are, businesses won't expand. Already, industrial capacity utilization has fallen to a record-low rate, indicating that companies have plenty of idle capacity to use before they need to invest.

To achieve sustainable growth, either the consumer must spend more, or the economy must restructure to become less reliant on the consumer. Unfortunately, it might take years for the labor market to fully recover from the massive job losses of the past few years. Most members of the Federal Open Market Committee said they expected it "to take five or six years" to bring the unemployment rate down to its long-run potential of around 5%.

Job losses might have slowed, but they haven't stopped. The unemployment rate is expected to peak near 11%, according to several economists. The current jobless rate is 9.5% and there are now nearly six unemployed people for every job opening. A sobering fact is that for the first time since the Great Depression, most of those who are unemployed have lost their jobs permanently.

Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday July 24th. This position has been open for 10 days:
The entire position is $1,560 in the red
SPY closed at $98.06 up 4.1% for the week
30-day historical volatility is 22.32%; implied volatility is 21.83%
SPY is treading ABOVE its 200-day simple moving average
SPY is trading ABOVE its 50-day simple moving average, 20-day EMA and 20-day Bollinger Band SMA(see SPY chart down below)
Relative Strength Indicator (RSI) is bullish See Spy chart below
Moving Average Convergence/Divergence (MACD) indicator is bullish See Spy chart below

Bear Call Spread
We initiated the SPY Iron Condor trade on July 15th. Immediately after executing this trade the market exploded to the upside. This unpredictable turn of events effectively turned a low- risk opening trade into a risky proposition. Furthermore, SPY rallied to defined resistance levels, paused and appeared to be trying to turn back down. But instead of reversing, the SPY gapped up through both resistance and our $96 short call strike price.

As defined in the Exit Plan, we need to do a series of simple trade adjustments to minimize potential losses and revise the risk profile for our Iron Condor. The recommended trades to close out the current call spread and open a new position are displayed in the CLOSING TRADE and TRADE ADJUSTMENT tables below

Bull Put Spread
The recommendation is to close out the put spread for an approx. $1,050 profit shown as shown below (this profit helps offset the loss from the call spread) . Considering the amount of time until August option expiration, there is a reasonable expectation that we may be able to do another put spread to further reduce the current overall SPY Condor loss position to a negligible amount.

Risk Analysis
When we initiated the August Iron Condor there was confirmed a short-to-medium term downtrend. Immediately after the trade the situation abruptly changed as the market gapped up and is now in a confirmed short-to-medium term uptrend. The $96 strike price on our sold call has been penetrated and the recommendation is to execute a trade adjustment as discussed in the BEAR CALL SPREAD section above.

Since we are closing out our put spread, and until we open another one, the only risk we have to manage is the $102 strike price sold call on the adjusted call spread. However as mentioned in the BULL PUT SPREAD section above, the expectation is that another short put will need to be monitored IF an opportunity that fits our trade profile presents itself. The risk associated with the sold call and/or short put will be evaluated and resolved based on the Exit Plan below.

Exit Plan
As with initiating the trade, the decision process for exiting our SPY Iron Condor 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 can hold out for a .05 bid.

If one of our short strikes is penetrated (closing price above our 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 the next month. 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.

We initiated the SPY Condor as one order with four legs. Exiting this position prior to expiration we will probably “leg out” of the trade by first unwinding either the bear call spread or the bull put spread; and close out the other side of the spread as a separate order. The timing of closing out each side of the Iron Condor is dependent on following our Exit Rules described above.

Final comment
The sequence of events that transpired the past few weeks is an absolutely perfect example of the importance of having defined trading rules and an exit plan. The market was clearly headed south and a loud chorus of analysts commented on head-and-shoulders chart patterns, Fibonacci retracement levels, unfavorable fundamentals etc. as a reason for expectation of further decline.

Our August Iron Condor trade was not initiated to anticipate the market direction, but the July Condor was closed out and there appeared to be a low risk setup for the next month position. After getting our minimum spread price for the August Condor, the market accelerated up the very next day. The situation become more quirky when the market gapped up to our resistance level, instead of pausing for a few days to let us evaluate doing a trade adjustment, the market gapped again. Nobody even remotely suggested this could happen, but it did! Volatile, fast trending markets are not considered to be the ideal market environment for Iron Condors. And the past few weeks clearly have tested the discipline and resolve of traders who employ market neutral strategies like the Condor.

Though the past few weeks were almost as bad as it can possibly get considering the timing of when our Condor trade was initiated, we still should end up okay and not hurt very much. After closing the current call spread and opening a new one and closing the put spread the net position will still be at a loss. But fortunately for us there is still almost four weeks left until August options expire, and we may have an opportunity to open another spread to either break even or end August with a small loss. No one enjoys losing money but losses are an inevitable part of trading. Our trading concept is similar to how insurance companies run their business - they manage risk, minimize losses and preserve capital – this is where our trade setup and exit rules come into play.

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.