Condor Options

We were ready to go with our first July trade (a SPY July/August double-calendar) Friday morning—all we needed was for the S&P 500 to show some indication of whether it was going to pull back from resistance in the 945–950 area or power through it. So we waited…and waited…and waited, as the S&P recovered from an opening sell-off to inch above 945, then collapsed back down to short-term uptrend support, which then held as the index traded around 940 for the rest of the afternoon. No breakout, but not exactly a rejection either.

Generally, we don’t care very much about market direction, but the 945–950 resistance zone, like the 865–880 area that SPX wrestled with in April, is a critical dividing line. (Click on chart to enlarge). What happens here will determine whether the intermediate-term rally continues into the summer, possibly chugging up to 1000 within a couple weeks, or the market begins a retracement that we’d expect to take the S&P back down at least as far as 880 by the end of June.

But that’s a worst-case scenario—daily momentum is still bullish, and there are plenty of support levels to cushion any pullback: first, there’s last week’s broken resistance in the 925–930 range, followed closely by the 200-day simple moving average (note that the bears have yet to yield the 200 EMA, as Jared so astutely pointed out on Thursday) and the 20-day right below that; running parallel to the 20-day is the intermediate-term uptrend support line, and the 50-day SMA is rising through 875 on its way to the 900 level.

Yeah, we could have gone ahead with a neutral trade centered at SPY 94 on Friday, because we can always make adjustments—and odds are we’ll have to eventually anyway—but it’s still early in the cycle, and waiting for a possible hint next week regarding how this critical test of resistance might turn out seemed like the prudent thing to do. And, of course, we get the best results if we’re well-positioned for the underlying’s price range over the first few weeks, as demonstrated by our June SPY trade:

SPY June/July Double-Calendar

We exited this position on Wednesday’s pullback for a profit of 15.79%. Given how this market has kept finding buyers at almost any excuse for support, we didn’t hesitate to lock in the gain as soon as it reached our 15% target for double-calendars. (Here’s something to remember the next time we book our target profit on a trade that later would have shown a larger gain: by Thursday’s close, this position had given up more than half the profit it was showing on Wednesday, and it came back into the 15% range only briefly on Friday.)

IBM June/July Calendar Spread (Adjusted)

At the bell on Friday, our flattened-out IBM position was showing a paper loss of about 13%. If the stock continues to close higher, we’ll roll the remaining contract(s) at the 100 strike up to 110. It’ll probably take holding on into expiration week to recoup a substantial portion of the current loss, but the odds favor continuing to follow our rules and staying in the trade as long as we’re not stopped out.

We’ll take another look at that SPY July/August double-calendar early next week—and perhaps something more interesting may turn up by then….