You have to wonder if president Obama and the congressional Democrats deeply regret spending almost two years trying to finagle healthcare legislation. The president and the Democrats were in a strong position to push through legislation focused on creating jobs â€“ hearing president Obama talk sometimes it almost seems like he believes jobs will reappear out of thin air? Whatever is one's perception of the new healthcare law (no one seems to have a full understanding of what it entails), any potential benefits don't fully kick-in for several years. In the meantime, the number of unemployed, underemployed, working poor folks continues to grow. Since unemployed folk won't have access to healthcare insurance at work, they will have to rely on the government for health insurance. This kind of lends credence to those who believe that president Obama is taking a path towards socialized medicine? Besides the democrats getting waxed in the last congressional election, a lot of people believe that when the healthcare law gets to the conservative Supreme Court, there is a strong possibility that it will be rejected.
The July 24th Couch Potato mentioned "...Recently, we noted that the major stock indexes had settled into a year long trading range...At some point, either on the upside or downside, prices will break through this trading range... For our trading strategy we obviously prefer that this trend continues as range-bound trading is the ideal environment for market neutral positions... the market tends to do what most people don't expect..." The party came to an abrupt halt for bullish spread positions as stock prices crashed with only a brief pause on Wednesday before continuing the carnage. We previously discussed how a price crash is the worst possible scenario for put credit spreads. Stock price crashes rapidly increase implied volatility which complicates doing trade adjustments. Fortunately, we have two weeks left before August option expiration which should be enough time to offset the potential loss.
As indicated in the stock charts below, momentum indicators and oscillators suggest that stocks are extremely oversold. From a technical analysis perspective, normally it might be a sound bet that prices might recover somewhat over next few weeks. However, all bets are off at this point, as we need to see how investors react to the S&P U.S. debt downgrade â€“ next week should very interesting for traders.
SPY Position Update
SPY closed $120.08 on Friday - the April position is approx. $4,700 in the red
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 BELOW its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is extremely oversold (See SPY chart)
Moving Average Convergence/Divergence (MACD) is extremely oversold (See SPY chart)
The July 5th Couch Potato published an August expiration month bear call spread
On August 1st the Couch Potato suggested closing out the short calls for an approx. $1,300 gain (see tables below)
The July 5th Couch Potato published an August expiration month bull put spread
This put spread is approx. $6,000 in the red (see tables below)
$128 strike price short put delta is -.9360 (6% probability this position will be profitable)
SPY Risk Analysis
The SPY position will need to be adjusted as the bottom fell out of the stock market last week. We expect to have to roll down the put spread and will be looking to do another call spread to help mitigate the potential loss.
DIA Position Update ---------------------------------------------------------------
DIA closed at $114.25 on Friday - the April 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 BELOW its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is extremely oversold (See DIA chart)
Moving Average Convergence/Divergence (MACD) is extremely bearish (See DIA chart)
The July 12th Couch Potato published an August expiration month DIA bear call spread
On August 2nd the Couch Potato suggested closing out the entire call spread for an approx. $1,700 gain (see tables below)
The July 27th Couch Potato published an August expiration month DIA bull put spread
This put spread is approx. $4,200 in the red (see tables below)
$128 strike price short put delta is -.7778 (22% probability this position will be profitable)
DIA Risk Analysis
Similar to the SPY risk analysis above, we plan on rolling down the put spread and would like to do another call spread to help mitigate the potential loss.
We have exited the SPY and DIA short call positions. Over next few days we will probably need to make a decision about how to adjust the put spreads. As mentioned above, if stocks do recover a bit from the current oversold conditions, we may be able generate additional premium from doing another call spread(s).
The July 31st Couch Potato Final Comment mentioed "...subscribers probably noted that first the first time since the 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..." Right on queue, last weeks stock price action is exhibit 'A' for the value of putting on both sides of an iron condor position, plus the benefit of hedging a short strike with a long position. You have to sacrifice some potential gain when you buy an option to cover a short strike. But if prices crash (or surge higher) covering a short position will save your behind and hopefully keep you from blowing out your account and out of the poor house.
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.