The bulls led an impressive charge the last few days of the week with the DOW leading the way by posting a plus 300 point gain. All the major indexes did well this week and recovered from last weeks losses. It has been reported that approximately 60% of the companies that have so far reported earnings beat the estimates. Investor mood appears to have morphed from gloom and doom to cautious optimism. The major indexes are at resistance levels and may be poised to break through. However, at this point, stocks are still trading range-bound until we get a confirmed breakout.
The main albatross is the jobs, or lack thereof. Last summer stocks rocketed on the expectation the economy was recovering and jobs would follow. Now most people expect job growth to be anemic and the question is how far can a fragile economy continue to grow with high unemployment and underemployment? A lot of pundits are wondering why the White House spent so much time and energy on healthcare while neglecting the economy (which the American public indicates is a higher priority). The Democrats will probably pay dearly in the fall for not creating enough jobs, but the indecisiveness about the economy benefits market neutral trading strategies. Perceived economic problems may be keeping stock prices in check and contributing to the recent range-bound trading. Though volatility is a little high, support and resistance levels have been relatively reliable.
SPY Position Update
SPY closed $110.41 on Friday â€“ the current August position is approx $300 in the black
SPY surged ABOVE its current 14-day EMA (see SPY chart down below)
SPY is trading ABOVE its 20-day Bollinger Band SMA (see SPY chart)
SPY is ABOVE its 50-day simple moving average (see SPY chart)
SPY is priced at its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) turned bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is turning bullish (See SPY chart)
SPY Bear Call Spread
The July 14th Couch Potato recommended an August expiration month call spread
This spread is approx. $300 in the black (see tables below)
$115 strike price short call delta is .2200 (78% probability this position will be profitable)
SPY Risk Analysis
The July 21st Couch Potato recommended a bull put trade to hedge against our call spread, however prices gapped up the next morning and that trade was not available. Since we have not had an opportunity to open a put spread, the only risk is a continued price surge threatening our $115 strike price short call.
DIA Position Update
DIA closed at $104.27 on Friday â€“ the August position is approx. at breakeven
DIA has jumped ABOVE its current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE its 20-day Bollinger Band SMA (see DIA chart)
DIA is ABOVE its 50-day simple moving average (see DIA chart)
DIA is priced ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is turning bullish (See DIA chart)
DIA Bear Call Spread
The July 8th Couch Potato recommended an August expiration month call spread
This spread is approx. $800 in the red (see tables below)
$106 strike price short call delta is .3722 (63% probability this position will be profitable)
DIA Bull Put Spread
The July 19th Couch Potato recommended an August expiration month put spread
This spread is approx. $760 in the black (see tables below)
$96 strike price short put delta is .1144 (89% probability this position will be profitable)
DIA Risk Analysis
The most probable risk at this point is the DIA breaking out above its two-month trading range and threatening our $106 strike price short call
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. However, if it is a few days prior to the expiration date, we may be able to 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 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 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.
The recent recurring Final Comment theme is the importance of being patient and letting the trade come to us. Insurance companies write business only when they understand the risk and believe they can generate sufficient premium to justify the contract â€“ our trading concept is similar. With the current relatively high market volatility, simultaneously initiating all four legs of a market neutral trade like the iron condor can be extremely risky, especially if one expects to generate a decent credit. One benefit of high volatility is that prices can fluctuate and make it easier to wait for the proper time to leg into a call or put spread. We are getting the range-bound trading that we like, the key is holding out until prices approach support or resistance so that we can manage our risk and get our premium.
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.