Market Summary
With three months to go it has turned into an unprofitable decade for most stock investors. The S&P began the year 2000 at 1,469 but now is approximately 27 percent lower at 1,050. The first decade of the new millennium trails only the 1930s as the worst in the modern investing era, and not by that much. This decade losses have averaged 3.2 percent annually, compared with 5.3 percent a year in the '30s. Plus there is evidence that America's infatuation with stock investing is dwindling. According to a mutual fund industry trade group, 45 percent of U.S. households owned stocks or mutual funds by 2008, down from 53 percent in 2001. That number is unlikely to increase as the biggest, richest and most invested generation starts to cash out.

Trade Setup
We are recommending an October expiration SPY Iron Condor trade, the next step is to figure out which strike prices will let us collect the most option premium AND minimize the risk of losing money.
SPY closed at $105.01 on Thursday (22 days to expiration)
SPY is trading at the support level of its current 14-day EMA (see SPY chart down below)
SPY is trading ABOVE its 20-day Bollinger Band SMA and 50-day simple moving average (see SPY chart)
SPY is well ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) has turned neutral (See Spy chart)
Moving Average Convergence/Divergence (MACD) is turning bearish (See Spy chart below)

30 day Historical Volatility is 15.93%, but Implied Volatility is higher at 22.47%. The difference is that Implied Volatility is one of the components used in option pricing, while Historical Volatility measures actual volatility that occurred during the past 30 days.
Upper range standard deviation is .84162, the lower range is -.84162.
Use the number of days to expiration, volatility number and the standard deviation to calculate the 80% statistical probability for the option price to close within our short strikes at expiration (allowing us to keep most all of the money we collected)!

We want the Bear Call spread short strike to exceed defined resistance levels :
$107 calculated based on previous intraday highs and technical resistance levels
$109 equals the upper price level of our 80% statistical probability range
$108 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 :
$99 calculated based on previous intraday lows and technical support levels
$100 equals the lower price level of our 80% statistical probability range
$97.61 is the lower Bollinger Band level – Solid purple line in the SPY chart below

We want the Iron Condor to generate a minimum .50 net credit on each leg AND we prefer the short strikes to fit our statistical probability profile (80% chance all the options will expire worthless and we get to keep most of the sold premium). The spread in tables below comply with our trading rules for initiating the October option expiration month SPY Iron Condor (based on yesterday's closing prices). The recommendation is to submit a limit order to purchase/sell the option strikes prices below.

Premium Credit $1.13
Total Option Premium Received $2,260 (Excludes commissions and fees)
Maximum Risk $7,740
Margin Requirement $10,000
20 contracts traded on each leg (number of contracts can be increased or decreased based on risk tolerance and/or funds available to trade; this will impact Total Premium Received, Maximum Risk amount, and Margin Required)

Risk Analysis
Despite the recent pull back, the market is still in a short-to-medium term uptrend. The obvious question is whether the SPY will trade range-bound and what direction and when will be the next price breakout. In the absence of indicators suggesting otherwise the safe bet for us is to presume the uptrend will continue. Our $109 short call strike price will be at risk if the market continues to trend upwards. The SPY 20 month SMA is providing technical overhead resistance at $107 and we will see if this level holds. If there is a market correction, the most obvious SPY support level should be the 20-day SMA which is approx. $103 (as displayed in the SPY chart above).

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
As discussed in the past, we will reiterate once again that for this particular trading strategy, the primary object is not to get hung up on trying to predict where the market will be in the future. Our primary focus should be to just listen to and understand what the market is 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!

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.