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Trade of the Week 1/17/2010

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Posted 18th January 2010 at 02:28 AM by Cataclysm1987

Hey everyone, it’s the weekend which means it’s time for my trade of the week. This week’s trade of the week involves a neutral trading strategy that benefits from the weakened performance of the S&P 500 over the past couple of weeks.
I love neutral trading strategies. While the market sure goes up and down, the most common motion for a particular security to undergo is sideways. It’s difficult for the market as a whole to make up its mind long enough to see a trend form. It’s also fairly difficult to snipe these trends, get in on them, and let your profits run while resisting the urge to exit the market or change your trading strategy mid trade.
Not a lot of people know how to trade neutral, so let me explain how I did it this time. I sold an iron condor, which is an advanced option spread, on the SPY, which is the S&P 500 index exchange traded fund. Basically it’s the fund that mimics the performance of the S&P 500. I sold the iron condor with the goal being for every single leg of the spread to expire worthless, and assuming the SPY stayed between 112 and 117 at the time I exit the trade, I will be awarded a profit on the spread. Here’s what the SPY did the past few weeks:
As I often do with option trades, I allowed the market to develop for a few days before placing the trade. Upon recognizing a weakening trend in the first couple of days after expiration Friday of December followed immediately by the formation of new resistance on the uptrend, I fired the trade. My secondary indicators for confirmation were the RSI, which remained between 30 and 70 for several months prior to the trade and only reached 73 as the high point of the trade. This bodes very well for an iron condor as it is very neutral and can remain within acceptable boundaries with a high probability of success if this indicator is observed correctly. I also noticed a flattening of the MACD which showed me a significantly weakened trend that may be preparing to stall, and since there are no recent volume spikes and a small average true range, I had everything I needed within my system to fire this trade with confidence and success!
For more trading tips and real world strategies like these, be sure to check back for next week’s trade of the week and some of the articles on the website.
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