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..."
And on November 6th the we wrote "...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...
The SPY weekly Heikin-Ashi chart right below suggest the index is continuing to consolidating into a tight trading range.
Normally a range-bound trading environment is exactly what the doctor ordered for doing market neutral credit spreads. But the current situation is challenging because of the abnormally high volatility levels. Note in the SPY daily chart how high volatility is generating almost daily triple-digit opening gaps. Obviously this means that when we set up a trade in the evening, if prices gap the next morning we have to re-evaluate the trade. There are still good opportunities to trade both bullish and bearish credit spreads in the current market, you just have to be more patient and disciplined about execution.
SPY Position Update
SPY closed at $126.66 on Friday â€“ the November position is approx. $400 in the black
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 rose 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 October 18th Couch Potato published a November expiration SPY bear call spread
This call spread is approx. $400 in the black (see tables below)
$129 strike price short call delta is .2768 (72% probability this position will be profitable)
SPY Risk Analysis
November options expire on Friday, therefore the risk is the SPY price approaching our $129 strike price short call prior to expiration.
As mentioned above, November options expire this week and at this point we need closely monitor our SPY bear call spread. The index has been bouncing off near term resistance and if it breaks through over the next few days we will need to make decision about how to adjust our short call
The November 6th Couch Potato Final Comment said "... 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..." The November 10th Couch Potato published a December option expiration SPY bull put spread trade with the caveat " If prices gap up tomorrow the put spread may not be available as published and unless the gap is filled we will hold off on the trade." We had to held off on initiating the trade as the SPY began the next morning with a lofty gap higher that was not filled and therefore eliminated the opportunity to do the published trade. Fortunately, December options don't expire for another five weeks and there will be opportunities to enter additional 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.