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This market's huge up day after such a sell-off yesterday has me thinking of poor exasperated Charlie Brown. The consensus explanation is that the market was surprised by the better than expected 3.5% GDP growth for the third quarter, but I don't think anyone really understands this market. What this volatility really shows is the general level of anxiety among traders; it takes very little to start either a bullish run upward or a panic for the exits. The lesson for us mice to avoid being squashed by the elephant stampede is old fashioned risk management: have a plan; follow your plan; and always have stop loss orders in place.
RUT ran up almost $14 to close at $580 while the SPX ran almost $23 to close at $1066. The SPX move was particularly strong and broad based across industry groups, which is why I decided to remove my hedge position on the Dec condors. But I certainly don't believe we are out of the woods yet. This is a scary market (and Halloween is coming!).
I sold the two Jan $510 puts I purchased yesterday to hedge my Dec iron condor for $11.50 (loss of $260) when the deltas of my short Dec $510 puts returned to 16. This left the P/L at +$200, delta = +$7 and theta = +$63. Make sure your stops are in place and be especially disciplined in this market.
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Today's market certainly answered our questions about consolidation versus correction. The S&P 500 broke through its 50 day moving average, closing at $1043, down over $20 on the day. RUT broke support at $576 and closed at $566, down almost $21 on the day. RUT's break through $576 confirmed the double top pattern we commented on yesterday. Investor's Business Daily (IBD) declared a "market in correction" yesterday and today's action made it abundantly clear to everyone. By the way, I highly recommend IBD's "The Big Picture"; they do an excellent job of tracking the overall market trend.
As the market opened up this morning in negative territory, I closed my Nov 520/530 put spreads for $0.90 (20 contracts). This leaves my Nov iron condor with 20 contracts of the 680/690 calls that are almost three standard deviations OTM. I will monitor them, but most likely will allow them to expire worthless. If that is the case, my Nov iron condor will have gained $2,060 or 13% on capital at risk.
Later in the morning, as the market carnage continued, I bought two contracts of the Jan $510 puts for $12.80 to hedge my Dec 500/510 put spreads. This is somewhat ironic since I just established that condor yesterday. This left my Dec condor at the close with a P/L of zero, delta = -$29 and theta = +$29. These weak Greeks illustrate how vulnerable the iron condor is to early moves against the position.
Allow me to make one other observation about today's activities in the market: as I was looking at my Nov condors this morning when the market opened down, I had a tempting voice in my head trying to convince me to wait and give it some time to turn around - "don't close those put spreads at a loss; maybe we can get out even later today or tomorrow". Later in the day, I was tempted not to buy the hedge for my Dec condor because I had just put that position on yesterday. But my short puts had already crossed delta = 17, so I bought the Jan puts. Develop your system and then follow your rules. It sounds simple, but anything involving our emotions is rarely straightforward.
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The volatility of this market can be a bit unnerving. It looked like we were in for a moderate sideways to up day this morning, which was reassuring after Friday's strong push downward. But just after 11 am ET, the bottom fell out and the rest of the day was in negative territory. The Russell 2000 Index (RUT) closed down over $7 at $594, just above support at $588-$590. The S&P 500 (SPX) closed down over $12 at $1067. The SPX broke through its support level at $1075. The next support level is at $1025-$1030. I am not suggesting anyone panic, but you definitely need to be sure you have contingent stop loss orders in place for all of your trades - this is a very volatile, and consequently, a dangerous market. You most likely will be whip sawed out of many trades, but that beats the alternative.
Some of us trade as though we were still in the era of full service brokers and high trading commissions. In that setting, we avoided trading in and out of positions because it eroded our gains quickly. Today's environment of online trading and discount brokers makes it very feasible to be stopped out of trades, reconsider the situation the next day, and re-establish the position with minimal cost.
My Nov iron condor on RUT stands at a P/L of +$2,340, position delta = +$33, and position theta = +$79.
Do you enjoy the thrill of the roller coaster? Follow your system and be diligent with your risk management and you will take much of the emotion out of this roller coaster ride.
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The markets traded erratically all day but decidedly more negative as the day worn on. The RUT closed down over $7 at $587, right at the support level set in late August; the next support level is at $576, set on Oct. 2. The RUT chart is a classic double top pattern that will signal a reversal of the up trend if RUT breaks $576 with strong volume. SPX closed down about $4 to $1063. The one piece of calming data is that the past several days of losses in the markets have occurred at average to below average trading volumes.
My Nov iron condor on RUT stands at a P/L of +$2,060, delta = +$49 and theta = +$80. The position theta/delta ratio has dipped below 2:1, and the delta of my short $530 put has risen to 12. My put spreads are at breakeven or slightly underwater (although I already banked $500 from rolling the original put spreads upward). I will be closing these put spreads if the RUT deteriorates any further.
I established my Dec RUT iron condors today with 20 contracts of the $500/$510 puts at a credit of $0.95 and 20 contracts of the $660/$670 calls at a credit of $0.95, for a total position credit of $3,800 on $16,200 at risk. I positioned this condor slightly bearish at a delta of -$15 and theta = +$81. So now we watch to see if the negative trend of the past few sessions levels out or accelerates into a full blown correction.
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I was impressed with yesterday's strong bounce off of support and am also impressed with today's move right back down to those support levels. The markets opened up this morning and basically trended downward all day. Both the RUT and the SPX closed at or just above their support levels. RUT closed at $601 and SPX closed at $1080. Today's candlestick patterns are the classic bearish engulfing pattern or what is known as an outside day in the bar chart world. So after the market looked pretty solid yesterday after strongly bouncing off support, now it has driven strongly right back down to support. The key to watch for on Monday is definite break of these support levels.
My Nov iron condor is still in good shape with a P/L of +$2,600, delta = +$12 and theta = +$69. Hopefully, the consolidation of the past several sessions will continue and we can just sit and watch the time decay. But today's strong down move certainly has my attention.
