The December 9th Couch Potato said "...The 'fiscal cliff' budget negotiation hangs over the market like a dark cloud. Right now emotion is driving daily trading sentiment as whenever financial news reporters interpret the day's comments from Washington as indicating a budget agreement is near, stocks move toward highs... However, when the daily news hints at a budget stalemate prices retrench...If this fiscal cliff episode is not resolved in a few weeks expect a steep equity sell-off. But if the White House and congress can agree to some semblance of a long term budget solution the coiled spring should 'pop' and thrust the major equity indexes back toward the recent highs from October...there is significant risk for both the bulls and bears...investors are taking a more tempered, wait-and-see approach..."
Traders will be on 'stand-by' as the stock market is typically quiet the last two weeks of the year. But money managers will be tethered to their mobile devices during the end-of-year vacation interlude in case they must react to fiscal cliff news. Traders and analysts will need to be on alert during this holiday season because as we have thus far observed, any budget deal could have a huge impact on investment markets.
The December 9th article also mentioned "...Expect trading volume and volatility to accelerate in the upcoming weeks as investors and money managers go through year-end window dressing and continue the tax related selling...Investors are cashing in stock gains to avoid the inevitable higher taxes next year...companies may continue to announce special and accelerated dividend payments before year end. If there is a market rally over the next few weeks expect some of these funds to chase prices even higher, plus money managers will take advantage of the opportunity to reposition their portfolios..." The Volatility Index (VIX) chart below indicates that trading volatility started accelerating this past week. Don't be surprised if volatility remains high as this coming Friday is the last quadruple-witching day of the year when contracts for stock options, stock futures, stock index options, and stock index futures all expire. Unless the unexpected happens and a budget deal is announced, there could be some heavy selling pressure this week as money managers continue their year-end asset reallocation. If stocks make it through this week relatively unscathed the market might be setup to move higher for a Santa Claus rally and January effect â€“ but again, the 800 pound gorilla in the room is the fiscal cliff negotiations which could rain on everyone's parade!
SPY Position Update -------------------------------------------------------------
SPY closed at $142.11 on Friday â€“ the December position is approx. $800 in the black
The November 29th Couch Potato published a December expiration SPY bear call spread
The call spread is approx. $800 in the black (see tables below)
$145 strike price short call delta is .1038 (90% probability this position will be profitable)
SPY Risk Analysis
The risk is a sudden price surge threatening our SPY $145 strike price short call prior to expiration day this Friday.
TLT Position Update -------------------------------------------------------------
TLT closed at $123.60 on Friday â€“ the December position closed approx. $1,200 in the black
The November 13th Couch Potato published a December expiration TLT call spread
On December 12th we suggested closing out the call spread for an approx. $1,200 gain (see tables below)
TLT Risk Analysis
As mentioned above we closed out our December TLT call spread and at this point we have no Treasury bond risk.
GLD Position Update -----------------------------------------------------------
GLD closed at $164.13 on Friday â€“ the December position is approx. $1,800 in the black
The November 13th Couch Potato published a December expiration GLD call spread
On December 12th we suggested closing out the call spread for an approx. $1,000 gain (see tables below)
The November 13th Couch Potato published a December expiration GLD put spread
The put spread is approx. $800 in the black (see tables below)
$161 strike price short put delta is -.1391 (86% probability this position will be profitable)
GLD Risk Analysis
As mentioned above we closed out our GLD call spread and the risk is gold prices crashing prior to option expiration this Friday and threatening our December GLD $161 strike price short put.
As discussed above regular December options expire this Friday which is also quadruple witching day and it therefore is reasonable to expect increased volatility this week. We will be looking for the opportunity to close out the SPY call and GLD put spreads prior to expiration.
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.