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The markets opened weakly this morning and traded down and sideways for about an hour but then rose pretty steadily throughout the day. The S&P 500 broke its significant resistance level at $1100 around noon, and managed to stay above that level into the close at $1103. RUT gained almost $5 to close at $614. Volume was up 13% on the NYSE and the major indexes traded strongly into the close. All in all, it was a pretty strong day in the markets and probably encouraged traders that the correction was over. I will feel more confident about that conclusion after seeing how the market handles the ADP payroll data tomorrow and the unemployment report Friday.
Today's move up in RUT pushed my Mar iron condor to a nearly perfect delta neutral position with an overall P/L of +$1,400, delta = -$1, and theta = +$84. The Feb condor is starting to feel the pressure on its 640/650 call spreads (the 640 calls have a delta of 16). The P/L = +$2,380, delta = -$102, and theta = +$229. So we wait and see if we will need to adjust those call spreads.
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Most of you realize I am very skeptical of the utility of CNBC. Today was a good example. Everybody was upbeat and looking forward to wonderful things ahead. Economic recovery, strong earnings, all is bliss. Last week you would have been tempted to slice your wrists after watching for a few minutes. The point to remember is this: one of the key success factors in trading is emotional control. That is why trading systems and their rules are so helpful - they keep our emotions in check. If you are a delta neutral income trader then this message is doubly important; I really don't care where the talking heads think the market is heading; I am just playing what the market does today.
The ISM manufacturing data this morning was a large boost for the markets. That index reported its highest number (58.4) since 2004. That manufacturing data together with a weaker dollar appeared to encourage traders. Another positive sign was strong buying right into the close of trading today. The RUT closed at $609, up over $7. The SPX ran up over $15 to $1089.
My Feb RUT iron condor now stands at a P/L of +$2,000, delta = -$33 and theta = +$232. This condor is now almost perfectly positioned at about plus or minus one standard deviation each way and theta is building nicely. On the other hand, my adjustments have narrowed the field here so it is likely we will be closing this condor early unless the market just trades sideways from here.
My March RUT iron condor has also moved into the black with an overall P/L of +$960, delta = +$27, and theta = +$72. In spite of my warnings above, we are all tempted to be looking forward - just don't act on it. In that spirit, is the correction over?
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Today's markets opened weak and traded down pretty severely until late morning; the rest of the day was choppy but generally up. A negative note was a sell-off in the last half hour. This often shows pessimism on the part of traders not wanting to hold much of a position overnight. As always in this situation, everyone has their explanation; often it is simply rationalization after the fact - it makes us humans think we are in control. Anyway, the increase in unemployment claims this morning certainly didn't help the dour mood; and the market is still concerned about Bernanke's reappointment. That is simply a case of "the devil you know". The street hates uncertainty. The S&P 500 dropped almost $13 to close at $1085. That is significant because that was the support level held during much of November and December. RUT lost over $10 to close at $608. Again, during most of November and December, RUT hovered in the $605 - $610 range.
My positions were sitting on the edge going into today's market so I wasted no time making some adjustments this morning. That was fortunate because it just got uglier. I closed the 20 contracts of the Feb 690/700 calls for $0.10 and opened 20 contracts of the 640/650 calls for $1.21. That balanced out the Feb iron condor nicely; now both spreads are approximately one standard deviation OTM with a net gain of +$1,160, delta =-$82 and theta = +$198. I modeled buying one or two Mar $570 puts but it killed my theta too much; rolling down the calls worked much better. I have boosted my theta sufficiently that I can buy a long hedge put later if necessary.
I made a similar adjustment to my March RUT iron condor; I closed ten contracts of the 690/700 calls for $0.38 and rolled down to 670/680 for $0.80. That brought the position to a net gain of $540, delta = +$10 and theta = +$72. So now we go back to the game of guessing how much of a correction is enough. But remember; that's a side game for amusement. Playing delta neutral positions relieves you from predicting - you just play what the market gives you.
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The markets traded up from the open this morning, but after about two hours, they turned downward and didn't look back. The SPX closed at $1074 after dropping almost $11 today. The S&P 500 is now down almost 7% since its 52 week high earlier this month. RUT closed at $602, a drop of almost $6; RUT is down a little over 7% since its 52 week high a couple of weeks ago. The major indexes had their worst monthly decline since February of 2009. All of this market carnage occurred in the face of a better than expected fourth quarter GDP report of an annualized rate of 5.7% (the street expected 4.7%). Some of the CNBC talking heads cite worries about European financial problems; the dollar traded higher, at least in part due to relative strength to the Euro.
My Feb RUT iron condor now stands almost perfectly centered at plus or minus one standard deviation with a P/L of +$1,660, delta = +$21 and theta = +$162. You can see the theta starting to build now that we are down to 20 days to expiration. The drop in RUT late today pushed my Mar RUT iron condor to the edge of adjustment; if RUT doesn't rally Monday, I will be adjusting this position. It now stands at near breakeven, delta = +$31 and theta = +$72. There is a good lesson here. We have had a significant correction this month, but neither of our condors are bleeding red ink. That is because we didn't just sit and hope it would turn around. The iron condor will eat your lunch if you don't actively manage the position.
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The first FOMC statement of the year caused a lot of choppy trading this afternoon, but the trading turned consistently bullish for the last hour, enabling some modest gains on the major indexes. The mixed reaction to the FOMC statement probably had to do with the fact that while interest rates will remain low, one fed governor voted against that policy. RUT closed at $618, up over $6 while the SPX gained a little over $5 to close at $1098. The $1100 resistance level that proved to be a significant barrier through most of November and December is now holding firm once again. RUT appears to have bounced off the support level at $610 set back in mid December before the markets broke out to new highs. The next strong resistance level for RUT is around $625.
Today's modest move upward was helpful for my iron condors. The Feb position now stands at a P/L of +$2,040, delta = +$46 and theta = +$86. The Mar condor has broken into the black with a gain of $610, delta = -$5 and theta = +$75.
