The major indexes posted their first weekly losses after five consecutive weekly gains. What is interesting is that even though we had a slew of earnings reports, most of these announcements were an afterthought to the eurozone bailout episode. Investors appear to be confused as recent trading days begin with triple-digit gaps either up or down. The market is obsessed with the European debt melodrama as pundits wait to see if the Greece bailout terms and austerity will be accepted.
The October 30th Couch Potato Market Summary mentioned "...Probably the best bet is that stock prices will settle into another trading range with resistance from the previous trading range converting to a support level as the market moves higher..." As evidenced in the weekly SPY chart below, this analysis appears to be accurate as over the past few weeks the major indexes have been confined to a trading range. Resistance from the previous trading range is now acting as support as stocks try to break through recent highs which are the new resistance level. With earning season starting to wind down it is reasonable to expect continued range-bound trading, albeit with high volatility.
SPY Position Update
SPY closed at $125.48 on Friday â€“ the November position is approx. $100 in the red
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 dropped BELOW 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 October 18th Couch Potato published a November expiration SPY bear call spread
This call spread is approx. $100 in the red (see tables below)
$129 strike price short call delta is .2830 (72% probability this position will be profitable)
SPY Risk Analysis
We have not had the opportunity to open a put spread, therefore the only risk is prices moving back up and threatening the $129 strike price short call.
As with initiating the trade, the decision process for exiting our November SPY bear call 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 above our short call ) 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.
Sometimes the best trade is not to trade depending on the trading plan and which whether one is placing a directional bet. We initiated the November SPY trade above almost three weeks ago and anticipated doing additional trades(s). But the market has not cooperated by settling at price to provide an opportunity for a low risk trade. The October 30th Couch Potato Final Comment said "... regular Couch Potato subscribers are familiar with our mantra 'to trade what we see, not what want'..." Note in the 60 min SPY chart below how almost each trading day over the past few weeks began with a violent gap either up or down. This means that if we published a trade in the evening based on the risk/reward profile in our trading plan, then the price gap the following morning would have made the trade unavailable as published, or would have involved more risk. As mentioned in previous articles, a key to market neutral trades similar to what is published in the Couch Potato is to mitigate risk. Especially in the current high volatility trading environment we need to be careful about preserving trading capital. The market will give us signal when the time is opportune to do more trades.
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.