The June 7th Couch Potato mentioned "... Today we closed out the $107 strike short call for an approx. $990 profit ... PLEASE NOTE as mentioned yesterday we will maintain the $112 long call. The ideal scenario is for stocks to bounce off support to recent high allowing us to sell another June Quarterly strike call..."
As we hoped, stocks lifted off support towards the 200-SMA which has been resistance. It will take a few days to figure out if this is a "dead cat" bounce or if there something more to it. But it is opportunity for us to follow through on our trading plan and generate more premiums.
DIA ETF Trade Setup
We are selling another June Quarterly short call - hedged by our $112 long
DIA closed at $101.88 on Thursday (20 days to June Quarterly option expiration)
DIA is priced close to its current 14-day EMA (see DIA chart down below)
DIA is trading close to its 20-day Bollinger Band SMA (see DIA chart)
DIA is well below its 50-day simple moving average (see DIA chart)
DIA is trading near its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is turning neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish but starting to turn up (See DIA chart)
30 day Historical Volatility is 27.50%, Implied Volatility is 26.18% - both numbers are near the upper level of their 52-week range
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.
We want the DIA Short strike to exceed defined resistance levels :
$103 calculated based on previous intraday highs and technical resistance levels
$106 equals the upper price level of our 80% statistical probability range
$107 is the upper level of the Bollinger Band â€“ Upper solid purple line in the SPY chart below
We want the DIA short call to generate a minimum .50 credit AND fit our statistical probability profile (80% chance the short strike will expire worthless and we get to keep most of the sold premium).
PLEASE NOTE the margin requirement will increase due to the $1 increase in the spread between the long and short call strikes. After selling the call we will return to the July-June Quarterly (Qty) bear call spread, also referred to as a calendar spread. The recommendation is to submit an order to sell the option strike below. Please confirm the correct option symbols with your broker.
20 contracts traded (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)
The rules for exiting DIA credit spread is:
Anytime the market maker is willing to accept a limit price of less than .11 on the short strike, 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 may be able to hold out for a .05 bid.
If the short strike is penetrated (closing price above the short call) AND after market close, if the delta associated with the short strike 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.
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.