The major stock indexes advanced enough during the month to record the best October since 2006. And if you remember, this past September was historically an exceptional month. Somehow it does not feel as if stocks had back-to-back months of extraordinary gains â€“ particularly the month of October where for the past few weeks prices have basically been confined to a relatively tight trading range. Traders have probably already priced in what they expect will be the election results â€“ Democrats out, Tea Party in, gridlock for the next two years. Most of the recent economic data and third-quarter earning results have been mostly positive, but traders appear to be looking past these results and focusing on the wild-card â€“ next weeks fed meeting. When rumors first came out about the Federal Reserve possibly announcing another round of stimulus spending at their Wednesday meeting traders became excited. But afterward comments from a few treasury officials and market analyst suggested that the proposed stimulus program might not be as aggressive as traders hope. This put a damper on investor enthusiasm. Wednesday is D-day and depending on what big Ben says or doesn't say will probably have a huge impact on stocks near-term direction.
SPY Position Update
SPY closed $118.49 on Friday â€“ the current November position is approx. at break-even
SPY priced 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 also ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is turning bearish (See SPY chart)
SPY Bear Call Spread
The October 21st Couch Potato recommended a November expiration month call spread
This spread is approx. $100 in the red (see tables below)
$122 strike price short call delta is .2466 (75% probability this position will be profitable)
SPY Bull Put Spread
The October 21st Couch Potato recommended a November expiration month put spread
This spread is approx. $200 in the black (see tables below)
$113 strike price short put delta is -.1878 (81% probability this position will be profitable)
SPY Risk Analysis
Upward momentum has clearly slowed but until there is a confirmed reversal the near-term trend is still bullish. If the current trend continues the most probable risk is that our $122 short call strike might be threatened.
DIA Position Update
DIA closed at $111.31 on Friday â€“ the November position is approx. at break-even
DIA is priced 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 also 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 bearish (See DIA chart)
DIA Bear Call Spread
The October 25th Couch Potato recommended a November expiration month call spread
This spread is approx. $160 in the black (see tables below)
$114 strike price short call delta is .2521 (75% probability this position will be profitable)
DIA Bull Put Spread
The October 28th Couch Potato recommended a November expiration month put spread (see tables below)
$107 strike price short put delta is .2214 (72% probability this position will be profitable)
DIA Risk Analysis
Similar to the SPY Risk Analysis above the most probable risk is that stock prices will continue to go higher and threaten our $114 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.
Market volatility is near the lowest level of the year and we were able put on all four legs of our iron condor(s). By definition an iron condor trade is hedged position that provides a layer of protection if stock prices go against either the call or put spreads. For most of the summer volatility was a little high and to minimize the risk to the overall position we "legged into" our spreads. But at various times the market did not cooperate and we ended up not being able to get into both sides of the iron condor. Fortunately we did a good job of letting the trades come to us and we weren't hurt much by not always being fully hedged. We don't want to press our luck and since the market is cooperating we need to take advantage of the opportunity to put on both sides of the trade.
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.