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The markets pulled back today and the talking heads attributed it to the Euro's weakness due to concerns about Greece causing a strengthening in the dollar and therefore weakening the stock markets. However, as most of us have observed over the past several months, the inverse relationship between the dollar and the markets is anything but consistent. Those of you in our webinar last evening will recall our discussion of the declining volume in the S&P 500 over the past five sessions as new highs were being made - clearly a bearish sign. But I don't think this amounts to anything more than some profit taking after a huge bull run. Trading volume was markedly up today, probably due to quadruple witching expiration - contracts for index options, stock options, single
stock futures, and index futures all expired today. RUT closed at $674, down a little less than $8 and the SPX gave up almost $6 to close at $1160.
My April iron condor was assisted by this move down today, the delta for this position now stands at -$19, pretty close to delta neutral, while theta is +$85. Someone in the Trading Group webinar asked why we didn't roll up the put spreads that are over two standard deviations OTM to move this position into profitable territory. My answer was that I was concerned about a pullback after such a huge run upward, especially in light of the recent declining trading volumes. We will be watching for signs of stabilization before rolling up those put spreads.
I was also asked last evening if the trouble with my March and April iron condor positions suggests that this strategy "doesn't work anymore". Trading the iron condor, or any delta neutral strategy, is a probabilistic strategy. Occasional losses are expected; the key success factor is a system of risk management that minimizes the losses so that the more frequently occurring gains are not wiped out. My loss of $2,850 in March is approximately what I gained in February ($2,794); my blog trading account is still up 36%. This trading strategy is like being in the insurance business; we will have claims (losses). As long as the claims don't wipe out the premiums collected on all of those policies, our insurance company will remain profitable. As long as our system of risk management minimizes our losses in the "bad" months when the market takes off in one direction or the other, our account will continue to have net gains.
However, if you started your insurance company a month or two before Hurricane Katrina hit, you might be discouraged and wonder if you were in the right business. Those of you who just decided to try trading the iron condor in March are in the same predicament. Hang in there. Use this time to reassess the risk management of your trading system. Keep fine tuning your system; continue to learn and improve. It is a feasible business.
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Trading in the markets was very choppy today, but with no net change by the end of the day. Trading volume was down 6-10% on the major exchanges. The CPI came in unchanged this morning, good news for those concerned about the Fed's easy money policy stimulating a round of inflation. One could argue that minimal inflation coupled with low interest rates should be a strong stimulus for business and consequently, the markets. From that perspective, this strong market move upward isn't surprising, but the record high unemployment numbers and Fed red ink gives one pause. The initial jobless claims number came down by 1% to 457k while the number of continuing claims rose a few thousand to 4.579 million. But this number does not include workers who have exhausted the "normal" unemployment benefits and moved into the extended unemployment benefits category. The VIX closed at 16.6%, its lowest level since May of 2008. RUT closed down less than $2 at $682 while the SPX closed unchanged at $1166.
Today's pause in the market's ascent was refreshing for my April iron condor position that now stands at a P/L of -$2,685, delta = -$75 and theta = +$120. The $720 calls have a delta of 13, so this position is relatively unstressed at this point; a couple of weeks of consolidation would be helpful after the damage inflicted by this recent rocket launch of the markets.
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The Commerce Department reported that new housing starts fell almost 6% in February but the market didn't pay much attention. Traders were focused on the FOMC meeting and their announcement this afternoon. The markets traded up on light volume before the FOMC announcement, then slowly declined most of the afternoon. Then the bulls came on strong during the last hour and drove the market indexes to strong finishes. RUT closed up over $5 to close at $680 while the SPX rose almost $9 to close at $1159. Trading volume was up 9% on the NYSE, 6% on NASDAQ, but fell below the 50 day moving average for the S&P 500. So the bullish trend appears to be intact, but it isn't clear if the institutional traders are strongly engaged; the trading volume seems too muted.
My Mar condor continues to benefit from time decay, but I decided to close my 680/690 calls this morning when the market opened up weak. I left the Apr 660 calls in place until tomorrow. I will probably allow the put spreads to expire worthless. The April position is going to be nearing another adjustment decision point if this bull run continues; theta is still over double the position delta at this point. This continued bullish trend baffles me; I keep waiting for the other shoe to drop, but so far it just keeps moving on up.
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The markets opened strong and kept trading up almost all day; some profit taking ensued around 2:30 ET, but the major indexes all closed with solid gains. Trading volume remains average to low; it was up 1% on the NYSE and 6% on NASDAQ; trading volume for the S&P 500 remains at its 50 day moving average. The Producer Price Index dropped 0.6%; that together with further analysis of the FOMC announcement appeared to encourage traders. Lower PPI encourages the inflation hawks and the FOMC language generally put a positive spin on the economic recovery. RUT closed up a little over $4 at $684 while the SPX closed at $1166, up almost $7. Both the SPX and RUT have been tracking along the upper edge of their Bollinger Bands since late February. Whenever I see this price behavior, I keep thinking it has to pull back, but you can incur a lot of damage by trading that belief. Tomorrow brings the CPI and jobless claims reports, but it seems unlikely those reports will derail this train.
I closed the last call positions for my Mar condor today; I will allow the 620/630 puts to expire worthless. After buying 3 hedge positions of long options and rolling spreads up and down nine times, this position ended up with a loss of $2,850 or 19% on twenty contracts. I was too aggressive in removing one of the call hedges at one point and that cost me dearly. The lesson here is that taking a small loss on the long hedge options is much preferable to a larger loss on the spread positions. But, in any case, it is a manageable loss. I was forced to roll the 700/710 calls of my April condor up to 720/730. This strengthened the position somewhat to a positive theta of $125 and a delta of -$87. March and April are turning out to be very tough months for delta neutral traders.
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The markets seemed quiet and cautious as they anticipate the FOMC meeting tomorrow. Trading volume was down about 10% on the NYSE and the NASDAQ. The Empire State Manufacturing Index fell to 22.9 from last month's 24.9 value, and that may have contributed to the market weakness this morning. But the buyers returned to the floor late in the day and drove the markets back up. RUT traded as low as $669, but recovered to close at $674 for a loss of $2. The SPX closed at $1151, essentially unchanged after trading as low as $1141. Tomorrow afternoon's market is likely to be volatile with everyone trying to analyze the Fed's announcement and guess when this period of cheap money is likely to start coming to an end.
My Mar iron condor position continues to lessen its loss each day; today's theta decay is $815. I may be able to hold the loss this month to approximately one month's gain - not a great performance but it meets the goal of minimizing the losses in these extreme months of market movement. Our April condor now stands at a P/L of -$2,175 with delta = -$18 and theta = +$81. Our position is essentially delta neutral and the theta/delta ratio is excellent.
