The August 26th Couch Potato mentioned "...Traders are continuing to play a game of 'chicken', making bets based on speculation about possible central bank intervention...fundamentals and technical analysis is taking a subordinate role in influencing the current price action...The technical picture remains bullish for stocks intermediate term direction. It is typical for the major stock indexes to make multiple attempts before finally breaking clear to new highs...Stocks are signaling price consolidation but even a short term pull back would probably be healthy for a longer term bullish trend..."
Investors interpreted Fed Chairman Ben Bernanke's Jackson Hole speech as the inevitability of further quantitative easing (QE). Market action following Bernanke's comments suggest that traders don't anticipate the Fed will announce the next round of QE at their upcoming policy meeting in a few weeks, but expect something to happen in the fall. Reacting to the expectation of more QE, the dollar plunged to its lowest level in three months on Friday based on anticipation that the Fed will probably flood the economy with even more dollars to purchase assets - this in turn will further drive down the value of the dollar. As a direct corollary to further quantitative easing debasing the dollar and Fed asset purchases, precious metals and Treasury note prices exploded after Bernanke's speech â€“ a lower dollar equates to higher asset prices.
Technically, we should expect the major equity indexes to continue to consolidate ahead of the next FMOC meeting in a few weeks. Treasuries have moved back toward recent highs and gold has broken out to high price levels from the spring. As noted in the GLD chart down below, gold jumped over its 200-day SMA during its recent price surge. Precious metals are overbought and ahead of the Fed meeting will probably trade range-bound between current highs and the intersection of the 200-day/20-day SMA's. The caveat to keep in mind is that trading volume should accelerate as traders return from summer hiatus. The market appears to have priced in additional QE, therefore the biggest risk might be the typical September price pullback as traders return to work and start focusing on the economy.
SPY Position Update -------------------------------------------------------------
SPY closed at $141.16 on Friday â€“ the September position is approx. $400 in the black
The August 13th ouch Potato published a September expiration month SPY bear call spread
The call spread is $400 in the black (see tables below)
$144 strike price short call delta is .2285 (78% 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 creeping up and threatening our September $144 strike price short call.
TLT Position Update -------------------------------------------------------------
TLT closed at $127.72 on Friday â€“ the September position is approx $800 in the black
The August 9th Couch Potato published a September expiration TLT put spread
The put spread is approx. $800 in the black (see tables below)
$120 strike price short put delta is -.1950 (80% probability this position will be profitable)
TLT Risk Analysis
We have not yet had the opportunity to open a September call spread and the risk is Treasury notes pulling back and threatening our September $120 strike price short put.
GLD Position Update -----------------------------------------------------------
GLD closed at $164.22 on Friday â€“ the September position is approx. $3,000 in the red
The August 13th Couch Potato published a September expiration month GLD bear call spread
The call spread is approx. $3,000 in the red (see tables below)
$163 strike price short call delta is .5860 (41% probability this position will be profitable)
GLD Risk Analysis
The precious metal price breakout has catapulted GLD above our $163 strike short call. Fortunately, there is ample time prior to the September option expiration and over the next few trading days we expect to adjust this trade.
Anytime the market maker is willing to accept a limit price of less than .10 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 week or so prior to the expiration date, we may be able to hold out for a .05 (or less) bid.
If one of our short strikes is penetrated (closing price above a 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.
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.