Stocks gained their first winning week in over a month after Fed Chairman Ben Bernanke signaled the economy is not in need of a quick stimulus. You have to love Big Ben, the guy is slick. In his speech at Jackson Hole, Wyoming the Fed Chairman played his cards close the vest. But he did strongly suggest that the Federal Open Market Committee will have many options to consider at its' next meeting, even to the point of extending the September meeting a full day to permit a fuller discussion of the central banks possible plans. So now for the next four weeks until the Fed meeting, market pundits, the talking heads on television, stock analyst, etc. will endlessly debate what the FMOC will or won't do, should or shouldn't try and what effect it will or won't have. The endless speculation will almost certainly take on a life of its own. Mr. Bernanke may have effectively check-mated the bears in the short term as we will be constantly reminded of the Feds potential to the juice the market higher. Downward stock price momentum was already losing steam and the big tease from Big Ben may have sealed the bottom.
The bears may be a little nervous speculating about what action the FMOC will take at its September meeting and whether this will ignite another price rally. But at this point the best bet is probably range-bound trading. As indicated in the stock chart below, for the past few weeks the major indexes have maintained a trading range and notice the Bollinger bands are starting to contract. It might be a little difficult for stock prices to take off much higher as traders have been taking every opportunity to sell into price rallies. Implied volatility is still at very high levels which suggest that even if the market does continue to trade range-bound we need to make sure that we exercise discipline when initiating our credit spreads.
DIA Position Update ---------------------------------------------------------------
DIA closed at $112.70 on Friday - the September position is approx. $700 in the black
DIA is priced at its current 14-day EMA (see DIA chart down below)
DIA is trading close to 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 neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is turning up (See DIA chart)
The August 18th Couch Potato published a September expiration month DIA bull put spread
This put spread is approx. $700 in the black (see tables below)
$100.75 strike price short put delta is -.1202 (88% probability this position will be profitable)
DIA Risk Analysis
We have not yet opened a September call spread, therefore the only risk is that stock prices continue downward and threaten the $100.75 short put strike price.
As with initiating the trade, the decision process for exiting our DIA 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.
As mention above in the Market Summary section, option implied volatility is at elevated levels. Though stocks appear to be set up to trade-range bound, the daily triple-digit price moves suggest that we need adjust how we set up our credit spreads. Regular Couch Potato subscribers should be familiar with the tactic that we like to utilize during periods of high volatility. Initiating a four-legged iron condor order that fits our trade criteria is highly unlikely in the current market environment. Even if we identify and publish a trade set-up, there is a high probability that the next day's price action may go against the published trade. What normally works for us is to suggest a call spread or put spread set- up, and initiate the published trade if prices remain stable the next day. However, if we mention a call spread and prices drop the next day, hold off on that trade. Likewise if the trade is put spread and the market rallies, abandon that trade. If we suggest a call spread and prices gap up the next day, depending on how much the market rallies, the best move might be to initiate spread at higher strikes to maintain a similar risk profile to the published trade. BUT, if you read about a put spread and we get a hard price drop the next day, in the current environment it is probably better to hold off altogether.
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.