The March 18th Couch Potato Market Summary mentioned "...the major indexes are consolidating at recent highs which from a technical perspective is considered a bullish event as it provides an opportunity for the market to resolve overbought conditions before continuing in the direction of the prevailing trend... what has been happening and what will probably happen is the market should continue to plow higher until we get a confirmed price reversal..."
As confirmed in the stock charts below this analysis is still valid as the major indexes are continuing to trade in a narrow range. Note that the technical momentum indicators and oscillators have dropped down from extreme overbought levels which is what we would expect to happen before the next price move.
It is reasonable to expect the major indexes to trade range-bound for awhile as the first quarter ends and investors hedge their bets while waiting on the upcoming earnings season. After companies start announcing financial results, it might not take much to move stocks higher. We can expect favorable earnings announcements to move the market up as it should not be a problem for companies to exceed diminished revenue and profit expectations. American consumers are spending more in stores and restaurants and the additional revenue should increase the likelihood of positive earning surprises. A good first quarter would confirm investors' expectations of a strong third and fourth quarter and justify current stock prices â€“ remember the market's current level is based on results six to nine months in the future.
SPY Position Update
SPY closed at $139.65 on Friday â€“ the April is approx. $800 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 priced ABOVE its 50-day simple moving average (see SPY chart)
SPY is 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 March 14th Couch Potato published an April expiration SPY bear call spread
The call spread is approx. $400 in the black (see tables below)
$143 strike price short call delta is .2355 (76% probability this position will be profitable)
The March 14th Couch Potato published an April expiration SPY bull put spread
The put spread is approx. $400 in the black (see tables below)
$134 strike price short put delta is -.1712 (83% probability this position will be profitable)
SPY Risk Analysis
The current trend is confirmed bullish and the most probable risk is prices moving up and threatening the $143 strike price short call
DIA Position Update------------------------------------------------------------
DIA closed at $130.60 on Friday
DIA is priced ABOVE its current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE its 20-day Bollinger Band SMA (see DIA chart)
DIA is priced ABOVE its 50-day simple moving average (see DIA chart)
DIA is ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is neutral (See DIA chart)
The March 21st Couch Potato published an April expiration DIA bull put spread. The article stated "if prices drop sharply then we will probably initiate the put spread at lower strike prices"
DIA Risk Analysis
The March 21st Couch Potato published an April SPY bear call spread, however prices gapped lower the following day(s) and the published trade was not available,. Therefore the only risk is a trend reversal with prices dropping and threatening the $126 strike price short put.
As with initiating the trade, the decision process for exiting our SPY and DIA credit 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.
Market volatility remains low as the major indexes upward momentum has slowed and prices are trading range-bound. This is reflected in the fact that we are able to execute all four iron condor legs versus only being able to trade either the call or put spread due to wide price ranges. As confirmed in the charts above, prices have basically trended high and hard all year which presents a challenge for managing credit spreads. Eventually, trends change and obviously we would prefer the current range-bound trend continue, as this is the optimum trading environment for credit spreads.
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.