The major indexes plunged below near-term support levels as traders react to the crisis in Japan and disappointing economic news. Stocks are clearly oversold, but with March expiration and quadruple witching day on Friday all bets are off as to when prices will recover. As illustrated below, the first order of business for us is to adjust the DIA put spread to minimize the loss.
DIA Position Update
DIA closed at $116.16 on Wednesday - the March position is approx. $2,500 in the red
DIA is priced BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading BELOW its 20-day Bollinger Band SMA (see DIA chart down below)
DIA is BELOW its 50-day simple moving average (see DIA chart)
DIA is still ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)
The February 22nd Couch Potato published a March expiration month bull put spread
This put spread is approx. $2,500 in the red (see tables below)
$118 strike price short put delta is -.9040 (11% probability this position will be profitable)
We are rolling the put spread out to the end-of-March quarterly expiration at lower strike prices
After the trade adjustment the total position should be approx. $600 in the red
As mentioned above, the bottom fell out and the DIA price broke through near-term support and triggered the exit rule for getting out of the trade. If prices have NOT recovered in the first hour of trading on Thursday then we cut our losses and issue an order to execute the CLOSING TRADE shown above; AFTER we get confirmation that the first order closed, then we can issue the order in TRADE ADJUSTMENT table above. If prices show signs of a recovery when the market opens tomorrow, then we will try waiting to initiate the trade when the price is near an intraday resistance level â€“ obviously the idea is to get a better closing price. We are betting that the lower support level will and hold over the next few weeks the oversold condition will resolve itself.
In the past we discussed how the quarterly option series can be a useful option to adjust a trade in the current month and avoid transferring the risk out to future months.
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.