The July24th Couch Potato Market Summary mentioned "... 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..."
Stocks have not yet made the break through resistance as stock prices pretty much ended the week where they began. Overall, July was the best month for stocks in a year â€“ though much of the gain was attributed to a few days of triple digit gains. The bulls and bears are battling for control of the market â€“ the bulls are using mostly positive company earnings announcements as ammunition to bid up prices. The bears are selling into strength, apparently betting that recent feeble economic reports portend a rocky road ahead for the economy. Next week the ISM issues two reports and the labor department will release its employment data, based on how investors interpret what they hear; the bulls versus bears stalemate may or may not be resolved.
The July 24th Couch Potato also stated "...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..." Obviously, this analysis is still valid. It was reported that the most of the investor sentiment numbers report an equal distribution of bears and bulls. Also note that we are not hearing much loud and boisterous bullish or bearish chest thumping, especially for the short-term. Contrarians would probably suggest that the current cautious sentiment almost certainly signals a break-out one way or the other. However, until we get the inevitable break through the current trading range, we will continue to take advantage of the favorable market conditions for doing credit spreads.
SPY Position Update
SPY closed $110.27 on Friday â€“ the current August position is approx $800 in the black
SPY is 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 just BELOW its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is neutral (See SPY chart)
SPY Bear Call Spread
The July 14th Couch Potato recommended an August expiration month call spread
This spread is approx. $800 in the black (see tables below)
$115 strike price short call delta is .1687 (83% 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 $104.70 on Friday â€“ the August position is approx. $300 in the black
DIA is 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 bullish (See DIA chart)
DIA Bear Call Spread
The July 8th Couch Potato recommended an August expiration month call spread
This spread is approx. $640 in the red (see tables below)
$106 strike price short call delta is .3837 (62% 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. $960 in the black (see tables below)
$96 strike price short put delta is -.0761 (92% probability this position will be profitable)
DIA Risk Analysis
The DIA is threatening a break-out above its two-month trading range which puts our $106 strike price short call 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. 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.
We have been discussing how stocks recent range-bound trading is to our liking related to managing the risk associated with our credit spreads. You might recall that last summer at this time we did repeated trade adjustments to keep pace with the market's rapid-fire price advance. Comparatively speaking, this summer has been more typical of summer price behavior. Plus the political gridlock in Washington and all the world-wide economic uncertainty has made it a relatively mellow summer for market neutral trading. We had a similar period the end of last year to beginning of the year, then volatility suddenly increased and market neutral trading became hazardous. Eventually this current period of relative tranquility will end and stocks will bolt up or down â€“ forcing us to become more active traders. However, until it gets to that point we will continue playing the favorable hand the market is dealing us and bank some profits.
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.