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It was only Friday that I was talking about the market trading sideways in a range while consolidating earlier gains. Well, the market showed me! RUT ran up nearly $17 to close at $603, while the SPX broke through the $1100 resistance that I thought would hold it for a while; SPX closed at $1109. The dollar is now trading near its 52 week lows and that spurred a rally in both stocks and commodities. Gold hit a new high at $1143 during today's trading.
I was concerned I had removed the hedges on my Dec iron condor on RUT too soon Friday, and that certainly proved to be true. I bought three Jan $630 calls for $13.50 this morning. My condor now stands at a P/L of -$1,335, delta = -$14 and theta = +$62. I could blame this misstep on the extreme volatility of late, but the fundamental error I made was on Nov. 2 when I closed the 660/670 spreads and rolled down to 630/640. That move was too aggressive for such a volatile market. The theta/delta ratio is good for now, but further moves upward will force me to start rolling out of the 630/640 spreads.
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The markets opened in slightly positive territory this morning and slowly gained throughout the morning in spite of generally negative economic news. The trade deficit for September was greater than expected, and that was followed by weak consumer sentiment numbers from the University of Michigan; but the falling dollar was enough to buoy the market. However, in the early afternoon, the negative news appeared to be taking its toll, but the bulls returned in the last hour of trading and recovered almost all of the lost ground. RUT closed up $6 at $586 and the SPX closed up $6 to close at $1093.
Early this morning, I decided to remove my Jan $630 call hedges (sold at $8.20 for a loss of $540). However, by the end of the day, my condor was nearly back to an area requiring adjustment. The condor now stands at a P/L of -$60, delta = -$64 and theta = +$124. The theta/delta ratio is pretty strong at about 2:1. It appears that the SPX will have difficulty breaking through $1100, so I am expecting the markets to trade sideways for a while here. This isn't too surprising after the strong rally of the past few months. A nice boring trading range would be welcome news for delta neutral traders.
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The markets opened up strongly this morning; RUT ran to $597 before pulling back to close at $593 at the end of the day (up almost $6). The SPX actually broke through resistance at $1100 to $1105 but couldn't hold it and closed at $1098.51. As in recent markets, the stock trading was tied inversely to the strength of the dollar. The dollar traded lower this morning, but then strengthened. Gold hit a new record high of $1118/oz before pulling back.
My Dec iron condor on RUT now stands at a P/L of -$350 with delta = -$25 and theta = +$87. I have clipped a shot of this position's risk/reward chart below. Note the effect of the Jan $630 call hedges; the red line is today's risk/reward curve - follow it with increasing price gains on RUT. Do you see how this hedge allows me to stay with this position and allow RUT to run as high as $620-$630 and constrain my position losses to about $2000? The advantage of this type of adjustment is giving the market time to turn back or trade sideways and therefore a chance to salvage my position. So we wait and see.
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Trading started off in the red this morning and never varied from that pace. The Russell 2000 Index of small caps was particularly hard hit today, dropping over $12 to close at $580. Meanwhile, the SPX dropped a similar amount in absolute dollar terms, $11.27, but about half as much in percentage terms, to close at $1087. The dollar's strength again appears to be the impetus behind today's stock market weakness. Unemployment claims numbers were actually a little better than expected, but the federal deficit hit a new high at $176 billion and analysts were expecting $150 billion.
My Dec iron condor now stands at a P/L of -$20, delta = -$5 and theta = +$88. I still have the Jan $630 call hedges in place but the delta of the Dec $630 calls has dropped back to 16, so I may sell those call hedges tomorrow unless the market rebounds. The volatility of this market makes it very challenging to trade these delta neutral strategies.
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Trading started in positive territory this morning, but within an hour, it had turned negative. The Russell 2000 Index (RUT) traded downward most of the day and recovered some during the last hour of trading but closed down at $587, just above the support level broken yesterday. The S&P 500 (SPX) also traded up initially and then downward all day. But the SPX regained all of its losses in the last hour to close virtually unchanged at $1093, just below the strong resistance at $1100.
My Dec iron condor was helped somewhat by the modest pullback on RUT to close with a P/L of -$10, delta = -$13 and theta = +$77. I still need the protection of the Jan $630 calls since my Dec $630 calls still have a delta of 20. It may prove difficult for SPX to break $1100 and RUT to break the resistance at $625 set with the double top in September and October. The markets may well trade in this range for a while. But this market has been proving everyone wrong of late, so be sure your contingency orders are in place.
