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The SPX closed at $1002.63 today, the first time above $1000 since last November. RUT is also in new territory at $565.78, although it broke its November highs Friday. Favorable manufacturing index and construction spending reports this morning resulted in steadily bullish trading throughout the day, pushing all of the indexes to new highs on increased volume.
These persistent new highs are taking their toll on my August positions. My Aug iron butterfly, that I just adjusted on Friday, is already on the ropes, with P/L = -$3,420, delta = -$131, and theta = +$164. My Aug iron condor now stands at P/L = -$1,340, delta = -$104, and theta = +$116. Both positions are near my minimum of 1:1 for the theta/delta ratio. Unless we get some sideways or downward market moves soon, I will be closing both of these positions. But I will most likely be closing both positions for less than a normal month's gains - that is one of my iron clad rules. In fact, I nearly closed these positions today, but the relatively large theta values are keeping me in the trade for another day.
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The GDP report this morning had a mixed message that led to quiet, choppy trading. Second quarter GDP dropped by 1%, better than the expected -1.5%, but personal consumption expenditures dropped by 1.2%, worse than the expected -0.5%. This left the major indexes largely unchanged on lower trading volume. RUT closed at $556.71, down $1.09. Today's RUT candlestick was an even more classic shooting star than yesterday. The psychological profile behind the shooting star candlestick pattern is this: the market opens and the bulls push the market to new highs, but they can't hold those highs; the bears pull it back down to a closing price near the opening price. Often, this suggests a weakening of the bullish side of the tug of war. We'll see.
My iron butterfly position is in trouble. I decided to give it one more gasp for a profit by closing the 550/600 call spreads and rolling them to 570/620 and closing the 460/510 put spreads and rolling them up to 480/530. Please note that every time I roll these spreads up to follow this trend, I am putting more capital at risk and decreasing the potential gain if the trade eventually works out. Thus, I wouldn't recommend this tactic for everyone, so don't follow it blindly. My current iron butterfly position consists of two contracts each of the 570/620 calls, 560/610 calls, 480/530 puts, and 470/520 puts, with a P/L of -$2,612, delta = -$73, and theta = +$167. This adjustment restored a more reasonable theta/delta ratio and kept me in the game, but the maximum potential profit is diminishing.
My August iron condor is handling this bullish trend well so far with a P/L of -$895, delta = -57 and theta = +$148. We are near an area of the risk/reward curve where the downward steepness begins to be painful as our losses increase. The consolidation of the RUT price chart over the past few sessions has helped this condor position a lot as the time to expiration has ticked away. We started this iron condor with a potential profit of $4,000; under no circumstances do I want to allow this position to lose more than that potential profit. So I will be watching the P/L and the theta/delta ratio as we progress into next week.
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All of the major indexes traded down today, but last hour buying, similar to yesterday, pared the losses back to around 1%. RUT closed at $548.38. The CBOE Volatility Index (VIX) has risen the past three sessions; a rising VIX suggests rising fear in the market. So we remain in this tenuous trading range, unsure whether it will basically trade sideways or if it is about to fall off the cliff. The rising VIX is measuring that fear.
My Aug iron butterfly sits at P/L = -$2,066, delta = -$86, and theta = +$156. Notice how our theta is slowly building as RUT essentially trades sideways; this is the advantage given the income options trader.
My Aug iron condor has a P/L = -$920, delta = -$21, and theta = +$148. The Sept $530 call we are holding to hedge our 570/580 call spreads is trading at $35 and about half of that is time value. While that is costing us some theta, we can't afford to sell it until the RUT makes a definite downward move. And $148 in theta is nothing to sniff at. So we continue to wait...
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Wow! I just cannot believe the markets are this strong. Initial jobless claims reported a higher number than expected this morning, but the market still rallied. All of the major indexes were up about 1% or more. RUT closed at $557.80. Looking at the RUT price chart, you will note that the previous three sessions were stalled right at the high price set back in early November, but today's action broke through that resistance level. If you follow candlestick charts, you will recognize today's "shooting star", often a sign of a reversal of a bullish trend. On the other side of the coin, today's highs were set with higher trading volume - a bullish sign. The bottom line for me is that I don't see the economic basis for this rally, but we have to trade based on what the market gives us, not what we think it should be doing.
My Aug iron butterfly is nearly exhausted; the P/L is now -$2,812, delta = -$126 and theta = +$132. A one to one ratio of theta/delta is weak. I nearly closed this trade today, but the pullback in the last hour or two of trading persuaded me to give it another day. You might disagree with that decision and I admit it is borderline; I may be allowing my prejudice about this rally to influence me.
My Aug iron condor is in better shape with a P/L of -$655, delta = -$53 and theta = +$107. A two to one ratio of theta/delta is good, albeit minimally good. Our Sept $530 call is up by more than three thousand dollars at this point - that call is keeping this trade alive.
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The Conference Board's consumer confidence report weighed heavily on the market most of the day, but buyers appeared during the last hour of the market to restore most of the markets' earlier losses. The SPX closed at $979.62, down 0.3%. The RUT was down as far as $544 during the day, but rebounded to close at $551.95, a modest 0.2% gain. This rally seems to contradict the generally dismal economic news and appears to have staying power, but who really knows? The fact of the matter is that most of the people participating in the markets today are nervous, having lost their comfortable rules of thumb over the past few months. So the next economic report or earnings announcement could trigger a rally or a sell-off. Remain cautious.
My Aug iron butterfly position is largely unchanged from yesterday with a P/L = -$2,270, delta = -$99, and theta = +$140. The $140 per day of time decay is comforting, but this position is right on the edge of requiring additional adjustment.
My Aug iron condor is slightly improved at a P/L of -$825, delta = -$35 and theta = +$123.
So we wait and see what the market gives us tomorrow: a strong move upward and more adjustments, or a downward move with a sigh of relief.
