Dr. Duke's Blog

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Written by Dr. Duke

Created: 28 March 2011

It looked like another modest, but upward trending day, but the bears showed up to play during the last few minutes of the trading session, pushing the major indexes to modest losses. SPX closed at $1310, down $4 while RUT lost $2 to close at $822. Trading volume dropped again today with only 2.5 billion shares of the S&P 500 stocks trading. Trading dropped 5% on the NYSE and dropped 10% on NASDAQ. The markets have been surprisingly bullish over the past few sessions given the number of worrisome global events and the apparent inability of the US government to address the spending/deficit issues. The equity markets are being propped up by the Fed. The questions surround how this play ends. The FOMC has announced that QE II will end by the end of the second quarter. Increasing oil and food prices are causing more Fed committee members and Fed watchers to begin to talk about tightening measures. In the meantime, the bulls appear to be in charge, although trading volumes have been anemic, suggesting many traders are wary.

My April iron condor on RUT is just churning out profits in this lackluster market. It now stands at a net gain of $1,900 with delta = +$16 and theta = +$61. My May RUT iron condor at 680/690 and 890/900 stands near break-even with a P/L of -$600, delta = -$55 and theta = +$88.The maximum possible gain on the April condor is $2,400. Some traders make it their practice to close credit spreads when they can confirm a majority of the gains. I have adopted the rule of closing spreads on the Friday before expiration if the spread is less than two standard deviations OTM. Otherwise, I allow the spreads to expire worthless. I prefer not to give away the $20 to $40 per contract plus the trading commissions unless I have to for safety's sake. In my experience, two standard deviations is a very safe margin. If you are trading many contracts, we are talking about several hundred dollars. That may not be much compared to the overall gains, but it is still one or two nice dinners at one of my favorite restaurants, like Picasso's in Las Vegas, or Wildfire in Chicago.

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Written by Dr. Duke

Created: 25 March 2011

Traders ignored the continuing unrest in the Middle East and Libya, the European debt crisis, and Japan's continuing woes and continued their buying spree this morning. The major market averages traded up until about noon and then slowly declined through the afternoon. But the day ended with gains across the board for all of the market indexes. SPX closed up $4 at $1314 and RUT closed at $824, a $7 increase. But all of these gains occurred on lower volume. 2.8 billion shares of the S&P 500 traded; this is not only down from yesterday but well below the 50 day moving average at 3.6B. Trading volume on the NYSE dropped 6% and trading decreased 8% on NASDAQ. Volatility declined slightly with the VIX closing at 17.9%. RUT rose intraday to hit $832 before pulling back to close at $824. RUT hit a temporary high of $830 in early March before dropping to a new low of $776 on March 15. Watching for a close above $830 in RUT would be one signal of a resuming bullish trend. Some analysts see today's strength in RUT as evidence of defensive moves into mid-cap stocks that tend to be primarily domestic companies with minimal global exposure.

My Apr condor on RUT is now positioned perfectly delta neutral with a P/L of +$1,840 and position delta = -$2 and position theta = +$66.

Have a pleasant and relaxing weekend.

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Written by Dr. Duke

Created: 24 March 2011

The markets traded down at the open this morning but then revived and steadily traded upward throughout the balance of the day. The SPX gained $12 to close at $1312, above the resistance level at $1300 that had proven a barrier the last couple of sessions. RUT gained $6 to close at $817. Trading volume was slightly up from yesterday with 3.1 billion shares of the S&P 500 changing hands; this is still well below the 50 dma at 3.6B. Trading volume was up 1% on the NYSE and up 14% on NASDAQ. The VIX dropped down to 18%, the lowest level this month.

Orders of durable goods dropped 0.9% in February, down from a 3.6% gain in January. Analysts had expected a gain of 1.1%. Unemployment claims are basically flat from last week with a 5k decrease in initial claims at 382k and a 2k decrease in continuing claims at 3.7 million. This economic data coupled with European debt issues and the usual problems in the Middle East and Libya appeared to be ignored by traders today - a little surprising, to me at least.

My April iron condor on RUT at 700/710 and 900/910 stands at a P/L of +$1,500 and delta = +$17 and theta = +$92. I will be watching to see if SPX can hold above $1300 tomorrow and give us more confidence that the bullish trend has resumed.

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Written by Dr. Duke

Created: 23 March 2011

The markets traded downward until late morning and then began a gradual climb upward for the balance of the day. The SPX bounced up against resistance at $1300 right before the close and pulled back to close at $1298, up $4. RUT gained $3 to close at $811. A weak home sales report set a negative mood at the outset this morning. New home sales for February dropped 17% to 250k, down from January's 301k. Analysts were expecting 288k. News that Portugal's parliament had rejected the austerity plans also weighed on the afternoon's trading.Traders continue to be concerned about the global economy slowing due to higher oil costs. I think traders are also somewhat reluctant to "go all in" as we anticipate the Fed ending its quantitative easing program. In summary, there are many headwinds for this market that make the likelihood of resuming the strong upward trend less probable. On the other hand, the market has held up rather well in spite of Middle East unrest, a Libyan revolution, natural disasters and fears of a nuclear mishap. This leads me to expect the markets to continue to trade sideways or slightly upward.

My April iron condor on RUT is benefiting from this trading range; it now stands at a P/L of +$1,660, delta = +$14 and theta = +$68. So we will just continue to play what the market gives us. Don't fall asleep.

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Written by Dr. Duke

Created: 22 March 2011

The markets opened upward a bit this morning, but immediately hit technical resistance and traded sideways and down the rest of the day. SPX hit $1299 right after the open, but never got close to $1300 again all day, closing down $5 at $1294. RUT closed at $809, down $4 on the day. Trading volume was very low with only 2.8 billion shares of the S&P 500 stocks trading today; this is the lowest trading volume in the S&P 500 this year. Similarly, trading on the NYSE was down 17% and trading volume was down 6% on NASDAQ. Traders continue to be focused on the unrest in the Middle East and Libya; oil traded above $105 today. The good news is that the markets have not broken down to test recent lows, but the bad news is that the bulls have not regained control of the markets. Based on today's volume, it appears most traders are on the sidelines watching and waiting.

My April iron condor on RUT at 700/710 and 900/910 is in excellent shape with both spreads about two standard deviations OTM. The current P/L is +$1,300 with a position delta of +$14 and a position theta = +$93.

So we continue to watch for signs of a renewed bullish trend or a continued correction. Or do we muddle sideways for a while?

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Written by Dr. Duke

Created: 21 March 2011

The markets gapped up at the open this morning but then largely traded sideways all day. SPX hit resistance at $1300, but held up pretty well, closing at $1298, up $19. RUT traded up more strongly, breaking through resistance at $807 to close at $813, up $18. Traders were calmed by improving news from efforts to bring the nuclear reactors in Japan under control and the UN's efforts in Libya. Oil prices remain high, but that didn't weigh on the market today. Trading volume dropped from Friday with 3.7 billion shares of the S&P 500 changing hands, but this is still above the 50 dma. Trading on the NYSE dropped 36% and trading volume dropped 32% on NASDAQ. It isn't clear as yet, from a technical standpoint, that this market correction is over. I would like to see follow through tomorrow with an open above $1300 on the SPX. The only economic data reported today was existing home sales for February at 4.88 million, down from January's 5.40 million, but traders didn't seem to take notice.

An excellent example of the irresponsible media hype was a headline on an article that read "Radioactivity Discovered in Foods", relating to tests of vegetables from areas of Japan near the stricken nuclear plants. But upon further reading, one finds that the level of radioactivity measured was equivalent to less than a quarter of the exposure of a single x-ray in your doctor's or dentist's office. Journalists once held their lack of bias as a measure of their integrity, but more and more, journalists pride themselves on pushing their own agenda as they write their stories.

VIX dropped to 21% today and this helped my Apr iron condor on RUT at 700/710 and 900/910. It now stands at a P/L of +$1,820 with delta = +$26 and theta = +$25. Theta for our position is rather low at this point because the call spreads are almost worthless. If RUT continues to trade higher, we will be able to close this condor early for most of our 14% profit potential. Delta of the short puts is at 6 whereas the delta of the $900 call is less than one.

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Written by Dr. Duke

Created: 18 March 2011

The markets opened strongly this morning but then proceeded to steadily give it back throughout the day. SPX closed at $1279, up $5 but only $3 off its low for the day. RUT closed up $9 at $795. Trading volume was up strongly from yesterday with 4.3B shares of the S&P 500 stocks trading. Trading was up 52% on the NYSE and trading volume was up 30% on NASDAQ. Options expiration probably drove most of this volume. SPX Mar options settled at $1287.71 and RUT settled at $793.28. Today's candlestick on SPX was the classic shooting star; when the bulls cannot hold the highs, it isn't a good sign.

All of the spreads of my Mar iron condor at 730/740 and 875/885 expired worthless today for the maximum gain of $4,160 or 24% on capital at risk. The Apr condor stands at a P/L of +$700 with a position delta of +$39 and theta = +$59.

Enjoy your weekend!

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Written by Dr. Duke

Created: 16 March 2011

The headline news has traders in a pessimistic mood, moving assets to cash. The SPX lost $25 today to close at $1257 while RUT closed down $9 at $782. Trading volume jumped up again today from high levels yesterday. 4.7B shares of the S&P 500 stocks traded today. Trading volume was up 11% on the NYSE and up 10% on NASDAQ. SPX bounced off support at $1260 yesterday and traded higher, but today it closed below that key support level. If it cannot hold $1260 tomorrow, we could see some real damage. The next support level is just below $1230, the peak set in November. SPX is now down 6% from the peak in February; a drop to $1230 would make it an 8% drop. Most corrections have historically averaged around 7-9%.

Economic data didn't create any confidence for traders to offset all of the bad news from Japan, the Middle East and Libya. Housing starts for February came in at 479k, down from last month's 6187k. Building permits were also down at 517k from last month's 563k. In addition, PPI spiked up with a 1.6% increase, fueled by energy and food price increases.The only less-than-bad news was oil prices remaining around $99/bbl.

My March iron condor continues to make its way to expiration with a P/L of +$3,660, delta = +$42 and theta = +$617. The 740 puts remain over three standard deviations OTM; unless the market tanks further tomorrow, I will allow all of the March spreads to expire worthless for the max gain of 24%. The Apr condor on RUT stands at a P/L of -$160 with delta = +$50 and theta = +$46. The delta of the Apr 710 put closed at 17.6 and is right at one standard deviation OTM.

So my iron condor positions are weathering the storm well, but most of my AAPL trades are underwater. The exception is my AAPL LEAPS that I have been selling calls against; those LEAPS remain profitable even after today's big drop. So now we watch to see if the indexes continue to drop or if traders realize that the US economy isn't that bad.

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Written by Dr. Duke

Created: 15 March 2011

The equity markets in this country behaved as though that was the headline this morning, as all of the major indexes plunged at the open. SPX traded as low as $1261 before recovering to close at $1282, down $15 on the day. RUT lost $7 to close at $791. The $1260-$1261 support level was established back in late December; today's action reaffirmed that support level. Volatility (VIX) jumped 3 points to close at 24%. Japan's Nikkei closed at a new 52 week low, but that is more understandable. Why did our markets drop so severely? I think the answer is the same reason we have seen such volatility in the markets since 2008 - fear. Today's FOMC report once again reaffirmed the growing body of data supporting a slow, but solid, economic recovery. But the fear remains because we see neighbors out of work and unable to sell their houses. We watch a dysfunctional government continuing to play politics with our country's future. The generally positive corporate earnings announcements appear in stark contrast to what we see everyday.

Trading volume was up strongly today with over 4.3 billion shares of the S&P 500 changing hands; trading was up 33% on the NYSE and also up 33% on NASDAQ. Strong trading volume on a down market day could be considered bearish. But look at a minute chart of the SPX; from about 10 am this morning, the market simply climbed upward, and that climb occurred on a big spike up in volume; that strikes me as pretty bullish.

The Fed reaffirmed QE II and the New York Fed's Empire Manufacturing Survey reported out at 17.5 for March, up from 15.4 last month. The National Association of Home Builders (NAHB) Housing Index came in at 17 for March, up 6%. So the indicators for our economy continue to point upward, but the fear remains.

The spreads of my March iron condor on RUT continue to cruise toward expiring worthless. The call spreads are over five standard deviations OTM while the put spreads are over three standard deviations OTM. The P/L stands at +$3,740 with delta = +$36 and theta = +$291. The Apr condor on RUT at 700/710 and 900/910 stands at a P/L of -$280 with delta = +$32 and theta = +$92. Today's volatility spike pushed it underwater but it remains delta neutral with a strong positive theta.

Conservative traders should remain cautious and protective, but I think the bulls are still in charge of this market. But there are many Chicken Little characters running around (younger readers may have to look that up).

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Written by Dr. Duke

Created: 14 March 2011

News of the disaster in Japan coupled with ongoing concerns about the Middle East and Libya overwhelmed traders today. The SPX fell to $1286 before beginning to recover in the early afternoon. SPX closed at $1296, down $8 and RUT lost $4 to close at $798. Support on the major indexes continues to hold, but the dips are not being bought aggressively and trading volume is light. Trading in the S&P 500 stocks was up a bit from Friday at 3.4 billion shares but still below the 50 dma. Trading on the NYSE was up 6% while it was down 4% on NASDAQ. The VIX jumped up to 21% today.

My Mar condor on RUT at 730/740 and 875/885 stands at +$3,960 with delta = +$17 and theta = +$129. Both spreads remain OTM by more than two standard deviations, so I will allow them to expire worthless unless that changes. The March condor will likely close out at a maximum gain of 24% with both spreads expiring worthless - very unusual. The Apr RUT condor at 700/710 and 900/910 stands at a P/L of +$480, delta = +$21 and theta = +$73. Both spreads are about one and a half standard deviations OTM, so this condor is well positioned with 31 days to expiration.

Most measures of the stock market's price levels (price/book, price/sales and price/earnings ratios) appear average to below average, so the market doesn't appear to be strongly overbought at this point. I think that is what is holding the markets at support levels as traders worry about a variety of global concerns. So we may continue in this sideways trading range for a while, or some unexpected global event will push the markets off the edge. It's a tough time for directional traders, but a great time for delta neutral traders.