The March 26th Couch Potato Market Summary mentioned "... As earnings season picks up steam and if traders like what they hear, stocks could easily get back to recent highs..."
The mini-correction of a few weeks ago already seems to be a distant memory. The global economic situation does not appear to have changed much; the situation in Libya is ongoing with more direct U.S. military intervention. Japan is recovering from last month's earthquake and tsunami, but it has been reported that highly radioactive water was leaking into the sea Saturday from a crack discovered at a nuclear power plant. Plus European markets are stressing as debt problems intensify at Irish, Portuguese and Spanish banks. So it appears the mini-correction may have actually been just a case of a bull market needing a reason to take a break before continuing the bullish trend.
Technically and fundamentally, stocks are set up to continue higher as historically, April and May are considered two of best months for stock performance. As we get deeper into earnings season and if companies report good results, this might drive the major indexes to new highs. And from a technical perspective, as indicated in the charts below, stocks are not near overbought levels. This suggests that there might be plenty of room above before we can expect price resistance. We need to see if the current trend continues and prices move higher, or are we at a resistance level which would suggest range-bound trading? As we have discussed before the one absolute certainly is the market always does the unexpected.
SPY Position Update
SPY closed $133.15 on Friday - the April position is approx. $200 in the black
SPY is 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 well 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 bullish (See SPY chart)
The March 22nd Couch Potato published an April expiration month bear call spread
This call spread is approx. $850 in the red (see tables below)
$134 strike price short call delta is .4059 (59% probability this position will be profitable)
The March 21st Couch Potato published an April expiration month bull put spread
This put spread is approx. $1,100 in the black (see tables below)
$125 strike price short put delta is -.0694 (93% probability this position will be profitable)
SPY Risk Analysis
The SPY price is moving back up towards its 52-week high which threatens the $134 short strike.
IWM Position Update ---------------------------------------------------------------
IWM closed at $84.54 on Friday - the April position is approx. $1,400 in the red
IWM is priced ABOVE its current 14-day EMA (see IWM chart down below)
IWM is trading ABOVE its 20-day Bollinger Band SMA (see IWM chart down below)
IWM is ABOVE its 50-day simple moving average (see IWM chart)
IWM is well ABOVE its 200-day simple moving average (see IWM chart)
Relative Strength Indicator (RSI) is bullish (See IWM chart)
Moving Average Convergence/Divergence (MACD) is bullish (See IWM chart)
The March 28th Couch Potato published an April expiration month IWM bear call spread
This put spread is approx. $1,400 in the red (see tables below)
$84 strike price short call delta is -.5750 (42% probability this position will be profitable)
IWM Risk Analysis
The IWM price already rose above the $84 strike price short call and if the current trend continues we will need to do a trade adjustment.
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 the delta rises to .65 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.
A few weeks ago stocks appeared to be down and out, and there were signs of a longer term correction. Put credit spreads appeared to be the more risky bet compared to doing call credit spreads. After the bulls took their breather, they have taken over and pushed prices back up to where there were before the mini-correction. And the market risk has changed as put spreads that seemed risky a few weeks ago are now a better bet compared to the call spreads. However, there are still several weeks before April option expiration and as we have seen in the past, momentum can change instantaneously and without warning.
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.