Market Summary
The White House and Congress are at an impasse on what to do about healthcare and financial regulation; the populace is upset by government bailouts of the automotive, insurance and banks - especially since no new jobs are being created. Banks are failing at a higher rate than normal and we still have high unemployment. The question is whether there is any substance to the current Bull Run other than emotion and momentum? There is still a lot of cash "on the sidelines" and as the market improves this money is invested – this scenario helps explain why stock and bond prices are both moving higher when they more typically move in opposite directions. Trading volume has increased and there are signs that small investors are starting to get back into the market.

Big Ben Bernanke and other economist suggest that the current recession might have ended, but people just aren't feeling it because although the rate of job losses may have slowed, jobs are still disappearing. Instead of trying to figure out a solution for creating jobs, the White House and Congress are running huge budget deficits and haggling over how to overhaul healthcare, energy policy, and bank regulations. The presumption is that the stock market is a leading indicator of economic activity, but even Big Ben hints that a turnaround in the job market is still a long way off. It will be interesting to see how/if the market continues to advance if consumers are going continue to be hurt by tight credit and job markets and cannot increase purchases their of goods and services?

Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday September 18th. This position has been open for 25 days:
The entire position lost $880 last week - to $460 in the black
SPY closed at $106.72 up 2.5% for the week
30-day historical volatility is lower – 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) extremely is bullish See Spy chart below
Moving Average Convergence/Divergence (MACD) is bullish 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 by trading the September Quarterly option series instead of the regular monthly options. This spread is $1,320 in the red and the $107 strike price short call delta is .4758 (52% 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)

Risk Analysis
The SPY has peaked through the upper trend line of the bull channel it has been trading in for the past few weeks and is threatening our $107 strike price short call. We will be watching this position closely to try to avoid sacrificing profits from the put spread and call spread closed out as described above.

The market is trading in a short-to-medium term uptrend and a lot of folks are anticipating an upside breakout due to minimal overhead resistance. Overbought indicators are sounding an alarm and some commentators believe that a minor correction is overdue. But the reality is that overbought, emotion driven rallies can continue indefinitely and at this point buyers are jumping in at any slight price pullback. Obviously, what we would prefer is that the prognosticators expecting a correction get their wish which would relieve some of the pressure on our $107 short call

Exit Plan
As shown above we closed out the original Iron Condor position at $1,780 profit ($980 on the call spread, $800 for the put spread). To generate additional premium we opened another call spread that is currently in a loss position. Let us closely watch this spread; if the unrealized loss threatens to wipe out the profit from the initial trade, then we will probably roll the current spread out to the October option series. The rules for exiting our current 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.

Should the unrealized loss approach $1,700, we will look to close out this spread (buy the short contracts, sell the long) and roll it out to the October option series.

If the short call strike price delta rises to .65, close out this spread and roll it out to the October option series.

On the last day of the month, if the rules above have not been activated, let the Bear Call spread expire worthless and we keep the entire sold premium for any open contracts.

Final comment
The market was very cooperative after our opening trade and we generated a quick realized gain. However after re-entering the call spread the market surged and is putting our short call at risk. Basically, the only difference between the first and second trade is timing. We can evaluate market fundamentals, perform technical analysis, and calculate entry and exit points, but the timing of when the market goes up or down is out of our hands. Even now we find bull market proponents trumpeting the beginning of the next market advance, while other commentators suggest the market is overbought and a correction is inevitable. Actually, both groups are correct, it is just the timing of when these moves will happen that is in question.

The point is that for our trading strategy, it is difficult to justify spending time trying to predict where the market is headed because nobody really knows. We need to listen to and understand what the market telling us right now, and manage our risk accordingly. Whichever direction the market goes we have a ready exit and are planning our next move. 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.