Easy credit helped drive economic growth over the past decade even though income remained relatively stable. But in the new world order financial institutions are reducing lines of credit and consumers are storing away their credit cards. Considering the current job market, clearly consumers have little choice but to eliminate as much debt as possible. But collectively, the lack of new credit sources and consumer reluctance to use available credit indicates spending will remain weak and adversely impact the economic recovery.
Businesses have not yet begun to make capital expenditures or hire people, and consumers are not in a position to spend; the main source of demand in the current economy is the government. Of course all this government spending is debt that businesses and individuals eventually are going to have to pay for anyway! Interest rates cannot go much lower, and giving people tax credits and money to make purchases has not substantially stimulated the economy. Is this "paradox of thrift" complicating the economic recovery and forcing millions of Americans into continued joblessness?
Listed below is the status of our SPY Iron Condor trade as of Friday September 11th. This position has been open for 18 days:
The entire position is $1,570 in the black
SPY closed the week at $104.77
30-day historical volatility is lower â€“ which bullish, implied volatility is also lower
SPY is well ABOVE its 200-day and 50-day simple moving averages (see SPY chart below)
SPY is trading ABOVE its 14-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) bearish momentum has stopped and is turning up See Spy chart below
Bear Call Spread
We initiated the SPY Iron Condor trade on August 26h and closed out the First Bear Call spread at $980 profit on September 2nd
The Bear Call spread that was part of the initial Iron Condor trade was closed out as described above. We recommended re-entering the same call credit spread except for trading the September Quarterly option series instead of the regular monthly options. This spread is $210 in the red and the $107 strike price short call delta is .2685 (77% probability this trade will be profitable) (see tables below).
Bull Put Spread
We recommended closing the Bull Put Spread at $800 profit on September 10th (see tables below)
Since we closed out our short $97 strike put, the only risk we have to manage is the $107 strike price from entering another Bear Call credit spread. The risk associated with the sold call will be evaluated and resolved based on the Exit Plan. This position must be monitored until to the end of the month (versus the regular 3rd Friday expiration).
The market is trading in a short-to-medium term uptrend and is still trading within the upper and lower bull channel trend lines. The question is whether the SPY index will break through the top of the channel and go higher (threatening our short call), or will there be a pullback to the lower level as suggested by overbought indicators?
The rules for exiting a Bear Call 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 call strike price is penetrated (closing price above the short call) 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 October option series. Unless this is option expiration week, no need to rush closing the trade, the market might reverse itself and remove the sense of urgency.
On the last day of the month, 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 hear a lot of market analyst talk about volume, or the lack thereof, and how this might mitigate any advance. From a technical analysis perspective market volume is important, but whatever the volume is, it simply takes more buyers than sellers to move the market up (and more sellers to move the market down). It is true that up or down moves on higher volume might signify investor sentiment. However, there appears to be evidence that the lower volume breakout moves we have been seeing all year are happening because the retail public is "sold out" and has not been investing in the stock market.
Market neutral trading strategies similar to Iron Condor generally perform better in less volatile market environments. It is presumed that lower volume translates into limited volatility, but as we saw from the middle of July through mid-August, short-term market surges can occur regardless of the volume. The point is that for our trading strategy, do not be infatuated with volume numbers; average volume has been going down all year, and we already review implied and historical volatility, and the delta as part of our analysis process.
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.