The July 24th Couch Potato Market Summary mentioned "...Stock prices are edging back up toward recent highs and the question is whether investors believe the strong second-quarter earnings will carry forward into the future and drive stocks higher..."
Obviously market momentum changed drastically in the past week as stocks ended the worst week in a year as time runs out on Washington to reach agreement before the government loses its ability to borrow money. The ongoing debacle with congressional legislators failing to work out an agreement to raise the federal borrowing limit has completely overshadowed all other financial news, most notably a slew of earning results. What is interesting about the debt ceiling negotiations is that bond traders don't appear to be a stressed out about it as equity investors. Ten-Year treasury notes actually rallied at weeks with yields going down, which is the opposite of what you would expect given the debt uncertainty.
The July 24th Couch Potato also said "...we noted that the major stock indexes had settled into a year long trading range. Thus far, every time stocks threaten a breakout past the April highs for the year or the March lows, prices revert to the mean and head in the opposite direction..." Last weeks market action pretty much reinforced the fact that range-bound trading is trading is still in play. Also as we have suggested in recent articles "...we obviously prefer that this trend continues as range-bound trading is the ideal environment for market neutral positions..."
SPY Position Update
SPY closed $129.33 on Friday - the April position is approx. at breakeven
SPY is priced BELOW 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 BELOW its 50-day simple moving average (see SPY chart)
SPY is just ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)
The July 5th Couch Potato published an August expiration month bear call spread
This call spread is approx. at $1,300 in the black (see tables below)
$138 strike price short call delta is .0699 (93% probability this position will be profitable)
The July 5th Couch Potato published an August expiration month bull put spread
This put spread is approx. $1,100 in the red (see tables below)
$128 strike price short put delta is -.4165 (38% probability this position will be profitable)
SPY Risk Analysis
Last weeks stock price plunge generated a trend change from near-term bullish to bearish. If the bearish trend continues the $128 strike price short put will be at risk.
DIA Position Update ---------------------------------------------------------------
DIA closed at $121.13 on Friday - the April position is approx. $1.300 in the black
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 just 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 July 12th Couch Potato published an August expiration month DIA bear call spread
This put spread is approx. $1,300 in the black (see tables below)
$128 strike price short call delta is .0982 (90% probability this position will be profitable)
The July 27th Couch Potato published an August expiration month DIA bull put spread that was executed the next day
DIA Risk Analysis
Similar to the SPY risk analysis above, if the current price plunge continues the $119 strike price short put will be at risk.
As with initiating the trade, the decision process for exiting our SPY and DIA spreads 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 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.
Exiting this position prior to expiration we will probably â€œleg outâ€ of each trade by first unwinding either the bear call spread or the bull put spread; and close out the other side of the spread as a separate order. The timing of closing out each side of the Iron Condor is dependent on following our Exit Rules described above.
Couch Potato subscribers probably noted that for first the first time since earlier in the year we have been able set up a both sides of the iron condor trade on all of our positions. Initiating both sides of a market neutral trade is critical from the perspective of being able to control trade risk. Despite not having a chance to initiate both the call and/or put spreads in recent trades, we have done okay because made sure the trades were set up properly. When stock prices trend hard up or down it can be challenging setting up both sides of a market neutral trade. But as mentioned above, it is considerably easier to initiate both sides of an iron condor trade in the current range-bound trading environment.
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.