An entertaining comment heard from a reader "Retail sales dip unexpectedly. Jobless claims rise unexpectedly. Consumer sentiment falls unexpectedly- UNEXPECTEDLY? Whoever's setting these expectations must live in a bunker painted to look like Romper Room, complete with a huge supply of happy meds. They probably won't go outside until after they've donned their Peril-sensitive Sunglasses. Has the term "unexpectedly" become the new less bad? It is easy to presume these "expectation setters" already have secure jobs, abundant healthcare, safe retirement funds â€“ which is why they can set expectations for those who don't!
According to Joshua Shapiro, chief U.S. economist at consulting firm MFR Inc. "Households are working to pay down debt and add to savings, longer-term trends along with little job growth making it probable that the U.S. consumer will not be much of a help during the early stages of the economic recovery." Another prominent economist confirmed that "households are in no position to drive a decent economic recovery."
The U.S. Labor Department reported the number of U.S. job openings at the end of June were near their lowest level since the Labor Department began tracking the data in December 2000. And the total number of openings in June is down more than 45% from the summer of 2007 with every industry and region reporting declines. Hiring activity also is at a historic low with the steepest declines being reported in the construction, trade and utilities sectors. Overall, hiring is down 33% since its July 2006 peak â€“ since consumer spending accounts for approx. 70 % of total economic activity this is not good news!
Listed below is the status of our SPY Iron Condor trade as of Friday August 14th. This position has been open for 31 days:
The entire position gained $920 last week â€“ to reduce the unrealized loss to $1,540 in the red
SPY closed at $100.79 down .9% for the week
30-day historical volatility is still going lower â€“ which bullish, implied volatility is stable
SPY is treading ABOVE its 200-day simple moving average (see SPY chart)
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 turning neutral See Spy chart below
Moving Average Convergence/Divergence (MACD) upward momentum has stopped and is starting to turn down See Spy chart below
Bear Call Spread
The short term Bull Run since the middle of July appears to be pausing just a bit. And of course, the million dollar question is whether this brief interlude is simply the market digesting recent gains prior to the next bull leg; or is this the initial stage of the market pullback many folks are anticipating â€“ only time will provide the definitive answer?
For the past few weeks the Coach Potato has discussed the recent scenario of how our low risk call credit spread trade morphed into a riskier version when the market accelerated up immediately after we opened the position. The tables below recap the adjusting trades to improve the overall Iron Condor position. Those of us who place value in the concept of "revert to the mean" can appreciate the recently overheated market taking a breather. We maintained breakeven the first few weeks after we opened the adjusted credit spread, last week the position had large unrealized loss, but that situation has reversed and we are back at breakeven again. Upcoming is option expiration week so it could be interesting!
Bull Put Spread
Below is a recap of the Bull Put spread was closed out three weeks ago for an approx. $1,050 profit (this profit helps offset the loss from the call spread) . Based on market conditions after closing out this spread, it appeared probable that we would have an opportunity to open another put credit spread trade. But the opportunity did not present itself; therefore the next step is beginning the evaluation process for next month's Iron Condor.
Technically the market clearly is in a short-to-medium term uptrend. Many investors are speculating on whether the pause over the past week is an indication that a short-term correction has begun. At the very least, over the past few weeks the SPY appears to be confined to a trading range between $99 and $102. The obvious question is whether the next price breakout will be North or South? If market pullback proponents are correct, the most obvious SPY support level should be the 20-day EMA which is approx. $99 (as displayed in the SPY chart above). And, as also displayed in the chart above the strength and momentum indicators are beginning to turn down.
Immediately after our call spread trade adjustment the $102 short call became threatened. From a risk management perspective, market follow-through on a downward move is the ideal scenario to relieve some pressure. As shown in the CURRENT PRICE-Bear Call Spread table above, the .35 delta can be interpreted as a 35% probability the short call price will be penetrated. The Bull Put spread position is closed; therefore the only risk we have to manage is the $102 short strike on the adjusted call spread. The risk associated with the sold call will be evaluated and resolved based on the Exit Plan below
Regular Couch Potato readers are familiar with our general guideline for when to exit a position. These exit rules are effective and ALL successful traders have some type of indicators that tell them the trade has turned unfavorable and it is probably time to recalibrate. But, there are exceptions to these rules and oftentimes option expiration week is the time to practice our improvising skills. At this point the NUMERO UNO objective is not to take a chance of ending the week with a market close above the price of ANY open short calls! On market expiration day if you have not closed the $102 short calls and the SPY closes at $102.01 or above, you will probably be assigned after the market close â€“ WHEN IN DOUBT GET OUT:
Anytime the market maker is willing to accept a limit price of less than .05 on the $102 short call strike, buy back all the short contracts and sell the $107 long strike price contracts.
If the $102 short call strike price is penetrated (closing price above the short call) AND the delta (probability of option expiring in the money) rises to .55 we will close out this spread (buy the short contracts, sell the long).
On option expiration day, if rules 1 and 2 above have not been activated, let the Bear Call 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 Bull Put spread has already been closed. The Bear Call spread will be closed out as a separate order following the Exit Rules described above.
Past Couch Potato commentary opined on the value of following defined trading plans and adhering to exit rules. Following up on this recurring theme, trading and trading plans do not need to be complicated to be profitable. Simple, basic, proven methodologies can be very, very successful. The most difficult trading skill to master is managing emotions. By its' very definition, opening and managing an Iron Condor trade is a relatively straight-forward endeavor; as such we are practicing sound, fundamental concepts that will have a high probability of success over time. Volatile market activity may challenge our emotions, but we should expect to be profitable in the long run.
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.