Dr. Duke's Blog

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Written by Dr. Duke

Created: 25 April 2011

A slow news day made for a slow day in the markets. I suspect the upcoming FOMC meeting also has traders hesitant to take any strong positions in advance of that announcement Wednesday. New home sales for March came in at 300k, up from 270k last month. SPX closed down $2 at $1335 and RUT closed at $844, down $1. Only 2.3 billion shares of the S&P 500 traded today; that is a record low for 2011. The only time we saw lower trading volumes recently was during the holidays at the end of 2010. Trading on the NYSE dropped 14% and trading on NASDAQ decreased 22%.

My May iron condor on RUT stands at a P/L of +$722 with delta = -$29 and theta = +$51. My June condor continues to sit near the adjustment point with a P/L of -$660 and delta = -$77 and theta = +$76. Unless the NFLX earnings announcement pushes the markets south (apparently a disappointing outlook was given), I suspect tomorrow's market behavior will be similar to today - yawn.

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Written by Dr. Duke

Created: 21 April 2011

AAPL's stellar earnings announcement boosted the markets today. Trading was choppy, but remained in positive territory all day, closing near the day's highs. The SPX closed at $1337, up $7 and RUT ran up $6 to close at $846. Trading volume was generally down today with 3.1 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE was down 15% and trading on the NASDAQ was down 10%. Initial unemployment claims dropped 13k from last week to 403k and continuing claims were flat at 3.7 million. Leading indicators were up 0.4% but this was down from last month's +1% gain. The Philadelphia Fed survey was disappointing; it dropped form 43.4 for March to 18.5 for April. But the market shrugged off this mediocre economic data and chose to focus on the positive earnings reports of late, especially AAPL and IBM that are seen as broad economic bellwethers.

My May iron condor on RUT is doing well with a net P/L of +$192, delta = -$45 and theta = +$82. I opened my June iron condor at 690/700 and 900/910 earlier this week, but the market has moved upward against my call spreads almost every day since then. My position remains underwater with a delta = -$72 and theta = +$78. The delta of the 900 calls is up to 16 and the fact that the theta/delta ratio is near one to one shows we are nearing a point of needing to adjust this position.

The exchanges will be closed tomorrow, so enjoy the long weekend!

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Written by Dr. Duke

Created: 19 April 2011

Traders opened the markets this morning in slightly positive territory and expanded the gains in the afternoon to basically return to where we started Monday morning before the S&P debt warning scared traders. SPX closed up $7 at $1313, the same as yesterday's opening price. RUT closed up $2 at $823. Trading volume declined from yesterday with 3.1 billion shares of the S&P 500 stocks trading; the 50 dma = 3.3B. Trading volume on the NYSE was down 20% and was down 7% on NASDAQ. Gold traded above $1500 for the first time today as traders continue to seek refuge from sovereign debt  and global unrest. S&P's warning shot yesterday probably fueled this move to gold, but equity traders were unpersuaded.

Housing starts came in at an annualized number of 549k for March and housing permits came in at 594k; both figures were better than analysts expected.

My May iron condor on RUT is positioned at 720/730, 890/900, and 920/930 and continues to build gains with a P/L of +$612 and delta = +$10 and theta = +$46. This is a slow economic news week, so the markets will primarily be driven by earnings announcements. One of the biggest to watch will be Apple Computer, after the close tomorrow.

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Written by Dr. Duke

Created: 18 April 2011

Standard and Poors warned that it may be forced to downgrade US debt at some point in the future and changed its outlook on US debt from"stable" to "negative". This drove markets down sharply at the open this morning, but SPX bounced at $1295 about 11 am ET and began to recover some of its losses throughout the day. SPX closed at $1305, down $15. RUT lost $13 to close at $822. In my opinion, traders realized that nothing really had changed and started picking up some bargains in the market. After all, who is surprised that the US has a debt/spending problem? Trading volume was modestly higher with 3.6 billion shares of the S&P 500 stocks changing hands. Trading on the NYSE was up 4% and was up 1% on NASDAQ.

Today's move down was helpful for my May iron condor position; it has moved into the black with a P/L of +$362, delta = +$8, and theta = +$53.

One has to be impressed with the resilience of this market; we keep having a variety of news shocks take the market down and get the bears excited. But it has been well contained in every case. Trading volume has remained fairly low with the large institutions remaining on the sidelines. The continuation of the bull market trend may be in doubt, but the much anticipated emergence of a bearish trend has not developed. But my iron condors don't depend on my market predictions. I find it easier to trade what the market gives me.

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Written by Dr. Duke

Created: 15 April 2011

Several positive economic reports drove markets higher at the open this morning and resulted in higher closes on all of the major market indexes. SPX closed up $5 at $1320 and RUT gained $8 to close at $835. The CPI rose 0.5% in March, matching February's rise and calming some inflation fears by those who expected an even higher rise. The New York Empire Manufacturing Survey reported 21.5 for April, up from March's 17.5. The University of Michigan Consumer Sentiment Survey reported a value of 69.6 for April, up from 67.5. And industrial production increased 0.8% in March - all in all, a pretty positive set of reports.

My May iron condor on RUT stands at roughly break-even with a position delta = -$16 and theta = +$68. With 34 days to expiration and our short options with deltas of 5 to 8, we are well positioned. Decreasing volatility is also helping this position.

Have a great weekend!

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Written by Dr. Duke

Created: 14 April 2011

A surprising jump in unemployment claims took the market down sharply at the open this morning, but it steadily erased most of the losses by the close of trading. SPX closed unchanged at $1315 while RUT resumed its hard charging ways by gaining $4 to close at $827. Trading volume was flat with three billion shares of the S&P 500 trading today. Trading volume was down 2% on the NYSE and down 2% on NASDAQ. Members of the FOMC reaffirmed their plans to continue quantitative easing; many have been criticizing their "easy money" approach in light of increasing food and fuel costs; but the Fed sees lagging job growth and is willing to risk inflation to reboot the economy.

Initial unemployment claims jumped to 412 thousand, an increase of 27k from last week. Continuing unemployment claims dropped 58k to 3.68 million. The PPI increased 0.7% in March, fueling debate about inflation and Fed policy.

My May iron condor on RUT moved slightly into the black (+$62) with a position delta of -$6 and position theta = +$58. The 720/730 put spreads are nearly two standard deviations OTM while the 890/900 call spreads are over one standard deviation OTM and the 920/930 call spreads are nearing two standard deviations OTM.

Now we return to trying to predict this market - it seems the bears and the bulls are pretty evenly matched at this point. And trading volume appears to suggest most big players are sitting on the sidelines watching the struggle. Of course, the beauty of our delta neutral trades is that we don't need to predict what is coming.

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Written by Dr. Duke

Created: 13 April 2011

The markets traded largely sideways today after opening positively this morning, but then slowly weakening. SPX closed unchanged at $1314 while the RUT tacked on $2 to close at $824. SPX remains right at its 50 dma; RUT bounced off the 50 dma this morning and then closed higher. Trading volume was flat to down with 2.9 billion shares of the S&P 500 trading; this remains below the 50 day moving average at 3.3B. The Fed released the Beige Book this afternoon and that may have helped perk up the market a bit with some evidence of continued economic recovery.

My May iron condor on RUT stands at a P/L of -$498 and delta = -$0.7 and theta = +$76. The remnants of our April condor will expire worthless this weekend and then we will start to look at establishing the June condor position next week.

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Written by Dr. Duke

Created: 12 April 2011

Trading opened in the red today and slid further as the day wore on. Alcoa's miss on revenues was taken as a negative commentary on the economy even though Alcoa beat earnings estimates. Oil prices dropped to $106/bbl after being as high as $113/bbl yesterday; this move took the energy stocks down but did nothing to help the overall market. SPX closed at $1314, down $10 and RUT lost $12 to close at $822. So RUT continues to beat SPX on the way down, just as it did on the way up. SPX dropped through the 50 dma at $1315 to $1310 before bouncing back to close at $1314, essentially at the 50 dma. RUT sliced through support at $830 and never looked back. RUT's next solid support level is at $808-$810. Trading volume was mixed, but generally up with 3.2 billion shares of the S&P 500 trading, just shy of the 50 dma at 3.3B; trading volume was up 17% on the NYSE, but down 82% on NASDAQ (due primarily to yesterday's unusually high trading volume on NASDAQ).

My May iron condor on RUT is back to a perfectly delta neutral position with a P/L of -$868, delta = $0.1 and theta = +$77. I have rarely had a position so delta neutral this far into the trade. Delta of the $890 calls has returned to 8. We still have a maximum potential profit of $1,442 after all of the adjustments we have made to stay in the position. Our put spreads at 720/730 remain almost two standard deviations OTM and the 890/900 call spreads are about 1.2 standard deviations OTM. So this position is in pretty good shape with 37 days remaining.

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Written by Dr. Duke

Created: 11 April 2011

The markets slowly traded downward as the day wore on, but most traders were watching from the sidelines. SPX closed at $1324, down $4 and RUT has lost its supremacy, closing down $7 at $834. RUT has now traded below its 2011 high set in mid-February; the next support level is $830. Significantly, trading volume in the S&P 500 hit its lowest level of 2011 at 2.4 billion shares. Trading was down 1% on the NYSE but was up 28% on NASDAQ. After the bell, Alcoa beat earnings estimates but disappointed on revenues; we'll see if that sets the tone for tomorrow's trading.

I removed the hedge on my RUT May iron condor position today. That leaves me with a P/L of - $1,318 and delta = -$34 and theta = +$94. The theta/delta ratio of about three-to-one is excellent. If RUT continues roughly sideways to down for a few weeks (38 days left), we will salvage a profit from this position. That is the advantage of a hedging adjustment rather than closing spreads as the index moves against the position. We remain in the position with an opportunity to close for a gain for the month.

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Written by Dr. Duke

Created: 08 April 2011

The markets traded sideways all morning and then slowly lost steam in the afternoon. Buying in the last hour of trading recovered much of the earlier losses. SPX closed at $1328, down $5. Unlike the past several sessions, RUT fared worse than SPX, losing $9 to close at $841. The absence of economic data or earnings announcements seemed to leave traders without much incentive to trade. Trading volume matched recent lows with 2.7 billion shares of the S&P 500 trading today. Trading volume dropped 8% on the NYSE and dropped 9% on NASDAQ.

The pull back in RUT took much of the pressure off of my May iron condor but I am waiting until Monday to see if it makes sense to remove my hedges. I have been burned before removing hedges too quickly. Small losses on hedge options are like the insurance premiums on your house. Even if my house didn't burn down, I don't feel badly having paid the insurance premium. The P/L stands at -$1,650 with delta = +$15 and theta = +$56. So our price risk is minimized and yet theta is still reasonably large.

Have a great weekend.