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Written by Dr. Duke

Category: Dr. Duke's Blog

Created: 20 October 2010

Last Updated: 20 October 2010

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That pull back was certainly short lived. The SPX closed up $12 at $1178; that was almost the mirror image of yesterday's market when it opened at $1179 and fell to $1166. Today's open was $1167. It would appear the bulls are back in charge and the QE II train is still running. The dollar lost ground today and that certainly helped stocks somewhat; and another batch of largely positive earnings reports was helpful as well. RUT behaved similarly, closing up $8 at $702 (yesterday's open was at $702). The Fed's Beige Book was almost the only significant economic news and the market just yawned. Trading volume was down from yesterday's highs but still at pretty high levels. 4.3 billion shares of the S&P 500 stocks traded; that is down from yesterday but still above the 50 dma. Trading volume declined 13% on the NYSE and dropped 9% on NASDAQ.

This market reversal caught my Nov condor without its hedge (closed yesterday). As Yogi would say, "it's like deja vu all over again." It seemed we were always getting whipsawed with our hedges in our October condor. I reapplied the Dec call hedges and reduced the position delta to a manageable -$35 and yet theta remains high at +$111.

So we wait to see if the euphoria over positive earnings and the prospect of further quantitative easing will continue to fuel this market. That doesn't seem reasonable to me, but we play what the market gives us, not what we believe should be happening.

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Written by Dr. Duke

Category: Dr. Duke's Blog

Created: 18 October 2010

Last Updated: 18 October 2010

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The futures were weak this morning and the market opened down initially, but quickly recovered and steadily gained throughout the day. The SPX closed at $1185, for a gain of $9. SPX appears to be on cruise control towards the April high of about $1220. RUT also gained on the day, up $7 to close at $710. RUT's April high was at about $745. VIX spiked up early, but settled to close at 19.1%, about where it closed yesterday. Trading volumes were down from Friday's highs, but still above average. Trading in the S&P 500 stocks came in at 3.9 billion shares, well above the 50 dma at 3.4 billion shares. Trading on the NYSE was down 31% from Friday and trading on the NASDAQ was down 22%. Industrial production declined 0.2% in September and capacity utilization was flat at 75%.

My November iron condor on RUT stands at a P/L of -$2386, with position delta of -$45 and theta = +$85. The delta of the short $740 calls rose to 27 today.

AAPL continues to run skyward, closing at $318 today; that forced me to close my Jan 2011 270/300/330 butterfly, locking in a 51% gain. My best guess is that AAPL will eventually pull back and continue to trade within the break-evens of this butterfly, but I was reluctant to watch the profits decline any further. I didn't want to let a 51% gain get away while I was waiting on a pull back. As it turned out, analysts were disappointed with AAPL's sales of the iPad, so my butterfly would have been worth a lot more tomorrow, but I didn't see a disappointing earning announcement in the cards.

Check out the Traders Expo in Las Vegas November 17-20. I will be speaking on the 19th, but much better known speakers than myself will be there. The organizers  have created an excellent program. And, best of all, you can register for free! Please make it a point to introduce yourself after my talk; I would enjoy meeting any or all of you.

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Written by Dr. Duke

Category: Dr. Duke's Blog

Created: 19 October 2010

Last Updated: 19 October 2010

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The pull back many of us have been expecting for some time finally occurred today. Financial stocks led the downward trend and a strong dollar contributed as well. Earnings reports from AAPL and IBM were both rather positive, but were not sufficient to prevent a bout of profit taking. That tended to set a negative tone to the market at the opening this morning. Housing starts for September were up modestly to 610k from last month's 608k. Building permits dropped from last month's 571k to 539k in September. So neither the economic news or the earnings reports were clearly the cause for the market's tumble. Many indicators have been pointing to overbought for some time and it finally tipped over today. SPX lost $19 to close at $1166 while RUT closed at $694, down $16. Stocks traded higher in the last few minutes of trading, a positive sign for the day. Trading volume was up across the board with 4.7 billion shares of the S&P 500 stocks changing hands. Trading on the NYSE was up 32% and was up 28% on NASDAQ. So we had a big down day on increased volume - that may suggest more down days in front of us.

I sold the Dec calls hedging the Nov iron condor position this afternoon as the delta on my short Nov calls hit 16. This position now stands at a P/L of -$2,306 with delta = -$70, and theta = +$150. The cost of my "insurance" was $780, but this position still has the potential for a $2,574 profit. The hedge served its purpose by keeping us in the game now that the market has pulled back. Our theta/delta ratio is quite strong. If the market continues to pull back, this position will be even stronger. If the market appears to stabilize, I will initiate the Dec condor position this week.

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Written by Dr. Duke

Category: Dr. Duke's Blog

Created: 15 October 2010

Last Updated: 15 October 2010

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All eyes were focused on Bernanke this morning, but nothing really new was revealed in his speech. The FOMC appears to be prepared for another round of quantitative easing, but many qualifiers are still sprinkled through the language. The markets appeared to be buoyed by this at the open as the SPX spurted to $1181, but then it pulled back and traded sideways through most of the day, closing up $2 at $1176. For those of you trading the SPX, it settled at $1183.67, reflecting that strong push early this morning. Homework question for you: how can the SPX settlement price come in higher than the high for the day? RUT behaved similarly, but closed down $2 at $703. RUT's settlement price was just posted a few minutes ago: $712.93. That represents an unusual divergence from Thursday's close to the settlement price for RUT; it has averaged only $4.42 all year (this was over $8).

One unusual note to today's market action: generally the major indexes traded sideways and closed largely unchanged for the day. However, trading volume was generally up and hit record highs of 5.2 billion shares in the S&P 500 stocks; these stocks have not traded at that level since July 1. Trading on the NYSE was up 27% and was up 10% on the NASDAQ.

Economic news was minimal and didn't seem to have much effect on the markets today. The NY Fed Manufacturing Survey came in at 15.7 for Oct, increased from September's value of 4.1. The University of Michigan Consumer Sentiment Survey reported 67.9 for October, down slightly from the previous month's 68.2. CPI rose a mere 0.1% for September.

My Oct iron condor clobbered me for a 60% loss. As I looked back over this position's history, two areas bled red ink. One was the cost of my hedge options, or my insurance. But my post audit revealed that I followed my rules for starting and ending those hedges; the RUT just conspired to trade up and down through my adjustment trigger value, resulting in many hedges and many small losses, accumulating to a large loss. So this was simply one of those "costs of doing business" in trading. However, the other area of red ink was entirely my mistake. After rolling my call spreads up out of danger in late September, I realized the position was a modest loser at best. I should have left it at that and taken the loss. Instead I rolled my calls down and the puts up in an attempt to salvage a gain from the month. The market's euphoria over QE II then proceeded to roll over my call spreads; that was bad timing for my position, but I should not have been there in the first place. Always evaluate your trading after the fact and learn from your mistakes. But don't beat yourself up too badly.

The Nov RUT iron condor is well positioned at a P/L of -$2,746, position delta of -$30 and position theta of +$85. The theta/delta ratio is excellent. We are hedged with Dec $740 calls. If RUT trades higher, we will roll the calls up, but leave the Dec calls in place to continue their gains. If RUT pulls back, we will sell the Dec calls.

Congratulations to those of you who played the GOOG straddle. I have the Nov 510/520 call spreads - merely a 40% trade rather then the 125% that was possible from the straddle.

Enjoy your weekend.