Earning season continues to wind down as 490 of the companies in the S&P 500 have reported first quarter results. The first quarter was regarded as a strong season for earnings with 73% of those reporting earnings beating consensus estimates and 68% reporting higher revenue. The longer term trend is in question with 59 of the S&P 500 companies issuing a negative earnings outlook for the second quarter, compared with 33 companies declaring a positive outlook. Now investors will need to bring the focus back to economic data that thus far has been mostly negative, including higher jobless claims, weaker-than-expected first-quarter economic growth, and a slump in pending home sales. The 'economic recovery' is petering along with the high unemployment that will probably put a lid on the economic recovery. Businesses are raking in enormous profits without hiring, so there's little reason to think that dynamic will change.
The recent Couch Potato theme has been focused on the current range-bound trading market trend. The May 21st Couch Potato stated ".... Upward bullish momentum is definitely waning, but this does not necessarily signal a hard fall is imminent... if equity prices pull back enough, it is reasonable to expect fund managers to buy shares... There are plenty of fundamental and technical reasons to suggest that range-bound trading will continue..." As displayed in the SPY chart below, the price bounced off support and my be heading higher back towards resistance. Leigh Stevens published an excellent Trader's Corner article on the OptionInvestor website that lays out technical analysis that will support the rationale for higher near-term prices. For your convenience, the link to the article is http://www.optioninvestor.com/page/oin/education/traders/2011/05-28.04-40-23.html. This analysis will support the supposition that the major indexes can be expected to bounce up and down between support and resistance levels.
SPY Position Update
SPY closed $133.51 on Friday - the June position is approx. $700 in the black
SPY is priced right at its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW its 20-day Bollinger Band SMA (see SPY chart)
SPY is just 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 neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is neutral (See SPY chart)
The May 16th Couch Potato published a June expiration month put spread
This put spread is approx. $700 in the black (see tables below)
$129 strike price short put delta is .2030 (80% probability this position will be profitable)
SPY Risk Analysis
We have not had the opportunity to initiate a bear call spread, therefore, thus far the only risk to the current June position is that a confirmed downtrend develops and threatens the $129 short put.
As with initiating the trade, the decision process for exiting the bull put spread position will be simple:
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 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.
The May 21st Couch Potato Final Comment mentioned "...We are on the lookout to initiate a bear call spread to complete the SPY iron condor position. If prices recover and the short $137/long $142 call spread is available, we will probably look to pull the trigger (depending on price/volume action and whether an acceptable price is available). There is no need to force the trade, even if the market does not cooperate over the next week or so, you have the option of pushing this trade out to the end-of-June quarterly option series..." We are still stalking this trade and if the recent price recovery continues we should be able execute a June quarterly expiration call spread.
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.