The March 25th Couch Potato Market Summary opined "...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...."
The major indexes did indeed basically trade flat this week as market watchers geared up for the 1st quarter earnings season. As we mentioned previously, don't be surprise if better than expected financial reports catapult stocks to the next bull leg â€“ already it has been reported that U.S. Automakers are expected to announce blow-out numbers next week, possibly setting records. Also, the government reported increased consumer spending in February which we suggested might contribute to favorable quarterly revenue and profit results. Take a gander at the weekly SPY Heikin-Ashi chart below and notice that the long term bullish trend is still in play. Yes, the technical momentum indicators and oscillators are flashing overbought signals, but it is very risky to bet against this trend in the near term. Eventually, the trend will change, but it will happen because of market forces, not because technical indicators say it is supposed to.
SPY Position Update
SPY closed at $140.81 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. $200 in the black (see tables below)
$143 strike price short call delta is .2944 (71% probability this position will be profitable)
The March 14th Couch Potato published an April expiration SPY bull put spread
The put spread is approx. $600 in the black (see tables below)
$134 strike price short put delta is -.1181 (88% 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 $131.80 on Friday â€“ the April is approx. $600 in the black
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 put spread is approx. $600 in the black (see tables below)
$126 strike price short put delta is -.1212 (88% probability this position will be profitable)
DIA Risk Analysis
The March 27th 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.
Small retail investors have trickled back into the stock market the past few months, but for the most part, a significant portion of retail investors are still very nervous about the stock market. For example, if you keep track of equity index put/call ratios you probably noticed that option traders are focused a lot more on buying puts versus calls. In a hard charging bull market similar to what we are currently experiencing you would normally expect a lot more call action. Also, trading volume remains anemic as the volume of New York Stock Exchange listed shares trades on all exchanges averaged 3.8 billion in the first quarter, down 14% from last years first quarter and lowest average volume for a first quarter since 2007. These are probably bullish trends as put/call ratios usually point to dominant call buying prior to a price pullback and the low trading volume would tend to confirm the lack of irrational exuberance that foretells a trend reversal.
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.