Stocks needed to blow off a little steam as most of the strength indicators were extremely overbought. The federal regulators civil fraud charges against Goldman Sachs along with option expiration day apparently was enough for traders to take back most of the markets gains from earlier in the week. We have been discussing how the stocks may be beginning to trade range-bound and when all is said done at this point that premise still has validity. The major indexes basically ended the week where they started and if this trend continues is should be a little easier to do market neutral trades.
SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday April 16th. This position has been open for 16 days:
The entire position is approx. at break-even
SPY closed at $119.36
30-day historical volatility and implied volatility are extremely low - both volatility numbers are near 52 week lows, which is considered bullish
SPY is priced at 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 still well ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) turned down but is still bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is neutral (See SPY chart)
SPY Bear Call Spread
This spread is approx. $750 in the red (see tables below)
$121 strike price short call delta is .3918 (61% probability this position will be profitable)
SPY Bull Put Spread
This spread is approx. $580 in the black (see tables below)
$111 strike price short put delta is -.1341 (87% probability this position will be profitable)
SPY Risk Analysis
Friday's price pullback ended the S&P's six consecutive week of weekly gains - barely. Friday's action notwithstanding, the bulls are still in charge and the S&P is still trading within its bullish channel. Unless the bears follow up on the recent pullback and drive the SPY price down to around $115 the most probable risk to our SPY iron condor is the $121 short call will continue to be threatened.
DIA Position Update
On April 15th we opened a May expiration month DIA Iron Condor.
DIA closed at $110.18 on Friday (36 days to May expiration)
DIA is priced ABOVE its current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE its 20-day Bollinger Band SMA, and 50-day simple moving average (see DIA chart)
DIA is still well ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) turned down but is still bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is neutral (See DIA chart)
In the tables below is the April 15th DIA iron condor trade (as posted in the April 14th Couch Potato) (see tables below)
DIA Risk Analysis
Friday's triple digit pullback notwithstanding, the DIA still ended the week higher and has gained seven consecutive weeks. If stocks continue Friday's downward move the DIA price may penetrate the lower level of the current bullish channel which would put the short put at risk.
The rules for exiting the SPY and DIA credit spreads 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.
If one of our short strikes is penetrated (closing price above our short call or below the short put) AND after market close, if the delta associated with one of the short strikes is .65 or higher, we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price. Unless this is option expiration week, do not panic and rush to close the trade, many times the market will reverse itself. 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 opened the both the SPY and DIA Iron Condors as a separate orders with four legs each. Exiting these positions prior to expiration we will probably â€œleg outâ€ 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 both Iron Condors is dependent on following our Exit Rules described above.
Sometimes timing is everything in trading and especially during option expiration week the market mood can be particularly temperamental. When the week started it appeared our DIA iron condor would be profitable, and then mid-week the DIA price gapped up and forced us out of the call spread (to minimize higher loses and avoid assignment). Of course prices pulled back on option expiration day and if we could have held out longer there would have been a nice gain. Unfortunately, that is the nature of the beast; the trade was set up properly, the stocks were starting to trade range-bound and BAM, a few days of higher volatility at the wrong time and a good trade turns not so good. No one likes losses, but good traders are able to accept the reality that the market will do whatever it wants no matter what we believe it could or should be doing.
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.