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Conflicting signals on the economy resulted in mixed trading in the markets today. Oil and commodities prices fell and worried investors that worldwide demand was not recovering; on the other hand, the S&P 500 bounced off its 200 day moving average on increased trading volume. The Russell 2000 Index (RUT) closed down about $3 to $494.03. This volatile, chaotic, largely sideways movement in the markets is actually nearly ideal for our delta neutral trades. But the volatility makes it a bit unnerving.
Our July iron butterfly stands at +$3,160, position delta = +$67, and theta = +$192. Our theta/delta ratio remains strong; I am beginning to look at the optimum closing for this trade sometime between now and this Friday (one week before expiration). However, I am in a class all day tomorrow and will probably only have a few moments to check on this position. Assuming no severe market moves tomorrow, I will be closing this position later this week.
Our August iron condor stands at +$660, position delta = +$14, and position theta = +$74. Since I still have 45 days left, I am beginning to consider closing the 570/580 call spreads and rolling that position down. The advantage is locking in about $1,000 of gain; the disadvantage is the loss of safety margin if this market rebounds - and there is no predicting this market; actually, all of our attempts to predict the market may be a bit futile, but the effort makes us feel better.
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It would be stating the obvious to note this market's erratic behavior. Yesterday, the pessimistic ADP private sector jobs report was ignored, and yet today's jobs report had almost identical data and the market tanked. All of the indexes dropped significantly; the Russell 2000 index dropped nearly 4% to close at $497.21. However, trading volume was low, so one has to wonder if this downward move will continue on Monday. A good rule of thumb to use when looking at a strong move in a stock or index price is to look at the trading volume for confirmation. A large price move on higher than average volume is more likely to be a sustainable trend. It is also worth noting that today's move has served to further strengthen the resistance level around $515 on RUT.
Our July butterfly now stands at a $2,835 gain with position delta = $39 and theta = +$167, an excellent 4:1 ratio. We are now under two weeks to expiration, so this position is gaining some breathing room.
Today's move pushed our Aug condor into a near perfect delta neutral position with position delta now at -$1 and theta = +$87.
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The markets traded lower today due to some weak consumer confidence readings (no surprise there), but trading volume picked up a bit later in the day. The Russell 2000 index (RUT) closed at $508.28 so our trades remain on solid ground with only minor changes in the numbers.
Our July iron butterfly continues on solid ground with a position delta = -$34 and theta = +$174; note how the time decay accelerates as we near expiration. Review the previous blogs from June 22 to today and note the trend in theta.
Our Aug iron condor stands at a minimal gain of +$40 (This is
really irrelevant at this point since we are only a few days into this
trade), delta = -$35, and theta = +$78. The delta of our short options
are unchanged at -11 for the $430 puts and +12 for the $570 calls, so no
adjustments are called for as yet.
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The markets moved higher again today. I'm not sure why - I suppose traders are interpreting all news as optimistic. The RUT closed at $517.46, right in the neighborhood of resistance set in January ($519) and then in early May ($512). The market shrugged off a pessimistic report from payroll-processing
giant ADP and the consulting firm, Macroeconomic
Advisers, reporting that private sector jobs fell 473,000 in June. Tomorrow's non-farm payroll report is not likely to be rosy, but it is unclear how this market will respond.
Our July iron butterfly is getting close to requiring an adjustment with a position delta of -$90 and theta = +$182; our theta/delta ratio is still strong, but if the market continues up in the morning, I will have to decide whether to adjust tomorrow or take some risk and defer to Monday. Since this position has a good chunk of profit and we have a three day weekend of time decay, it will be very tempting to postpone the adjustment decision.
Our August iron condors are fine with position delta = -$56 and theta = +$92; the $570 call's delta is 15. I think it is unlikely we will have to adjust this trade, but if the short call delta reaches 18-20, I will adjust even though I won't understand why this market is so strong. But we have to remember to follow our rules rather than attempting to predict the market's moves. It is prudent to watch the market closely and do your best to anticipate its moves, but it is imperative that we never get into the position of thinking something like, "the market can't continue to move up, so I am not going to adjust my position because I am sure it will pull back". In general, we want to respond to the market's moves, rather than predicting its moves. Trade what you see, not what you think is coming.
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Today, the markets largely traded sideways on lower volume. This is typical of shortened holiday weeks on Wall Street; the exchanges are closed Friday for Independence Day, and many traders take off a few days early for the holiday. Of course, this environment is perfect for our nondirectional trading strategies that benefit from time decay.
The RUT closed at $510.61. Our July iron butterfly stands at a $2500 gain, delta = -$45 and theta = +$161, so this trade is in good shape and no action was necessary.
Our Aug iron condor stands at a minimal gain of +$220 (This is really irrelevant at this point since we are only a few days into this trade), delta = -$42, and theta = +$85. The delta of our short options are at -11 for the $430 puts and +12 for the $570 calls, so no adjustments are called for as yet.
