Dr. Duke's Blog

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Written by Dr. Duke

Created: 09 March 2011

Oil prices dropped about 1% today and oil inventories increased over 2.5 million barrels last week (only one million was expected), but this didn't tempt traders to start buying again. The SPX lost $2 to close at $1320 and RUT closed at $821, down $3. Trading volume was down except in the tech stocks as semiconductor stocks especially took a bath. 2.9 billion shares of the S&P 500 stocks traded today, well below the 50 dma. Volume was also down on the NYSE by 11%, but increased 9% on NASDAQ. Mortgage applications increased 16%; this is thought to primarily reflect investors buying properties, but it is a good sign nonetheless.

The markets appear to know where my iron condors are positioned and are doing their best to cooperate - very unusual behavior. My Mar RUT condor at 730/740 and 875/885 stands at a P/L of +$3,500 with a position delta of +$1 (yes, one dollar) and position theta of +$170. The put spreads are almost three standard deviations OTM and the call spreads are nearly two standard deviations OTM. The Apr RUT condor is also well positioned at 700/710 and 900/910 stands at a P/L of -$360, with position delta = -$19 and theta = +$104. The theta/delta ratios of both positions are excellent. I view my position delta as my principal measure of risk while the position theta is my measure of profit generation. In condor land, the traders are unusually happy today. Through most of 2010, they were in therapy.

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Written by Dr. Duke

Created: 08 March 2011

The markets took off to the races today and essentially replaced yesterday's losses in a surprising turn-around. SPX gained $12 to close at $1322 while RUT also tacked on $12 to close at $825. But trading volume was flat to down from yesterday with the S&P 500 stocks trading right at the 50 dma of 3.4 billion shares. Trading was down 3% on the NYSE and down 16% on NASDAQ. With oil still trading near $105/bbl, this market rally was surprising. Investors Business Daily (IBD) reset their market posture to "Market in Correction" from "Uptrend Under Pressure". This move was based on yesterday's market losses, but it is significant because it reflects many weak technical internals for this market.

Of course, the tendencies for this market to trade up and then back down the past couple of weeks has been good news for my condors. The Mar position on RUT at 730/740 and 875/885 now stands at a P/L of +$3,340 with delta = -$15 and theta = +$192. Theta is really ramping up as we near expiration. The Apr condor on RUT at 700/710 and 900/910 stands at a P/L of -$300 with delta = -$27 and theta = +$99. This position is in good shape as evidenced by the strong theta/delta ratio and the small deltas of about 8 for each of the short options in the spreads.

So we wait to see what the markets will bring tomorrow. My opinion is that the overall bullish trend is still intact, although some extraordinary events in the Middle East or Libya could change that at any time. But barring that, I expect oil prices to stabilize and some of the fear to come back out of the markets. But it seems unlikely that the bullish trend will continue with the steepness of the advance we saw a couple of months ago.

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Written by Dr. Duke

Created: 07 March 2011

Oil continues to trade higher and traders continue to worry about the impact of these higher oil prices as they percolate through the economy. Trading opened in positive territory this morning but then stock prices started to slide lower all morning and hit lows in the early afternoon before recovering somewhat. SPX traded as low as $1304 and closed at $1310, down $11. RUT lost $13 to close at $812. Trading volume was flat or down as the S&P 500 stocks traded down to the 50 dma at 3.3 billion shares. Trading on the NYSE dropped 2% but trading volume increased on NASDAQ by 15% as many of the tech stocks sold off.

The broad markets, as measured by SPX, have been trading in a sideways consolidating range for the past several sessions; this has been good for my condor positions. My Mar iron condor on RUT stands at a P/L of +$3,220 with a position delta = +$14 and position theta = +$156. The Apr RUT condor stands at a P/L of -$140 with delta = -$2 and theta = +$87. GOOG broke through long term support at $600 today, so I closed some of my GOOG trades. As far as I can tell, this move downward is a general "market following" move, so if oil prices settle, GOOG should rebound. Many traders are reluctant to make any moves, bullish or bearish, on this market until they see how the so-called "day of rage" protests play out on Friday. Some had called for these protests to be moved to today, but that didn't appear to take hold. But traders may not relax until this week is behind us.

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Written by Dr. Duke

Created: 04 March 2011

The jobs report came out this morning and was relatively good with an increase of 192k jobs and the unemployment rate fell to 8.9%. But apparently, yesterday's wild ride was predicated on an even better jobs report. Of course, oil rising to $104/bbl didn't help but many traders are starting to see the Middle East and Libyan situations as old news. However, the rumors are still flying and that contributed to the low points of trading today. By the end of the trading session, much of the earlier losses were recovered. SPX traded as low as $1313, but recovered to close at $1321 for a loss of $10. RUT fared better, losing $4 to close at $825. Trading volume was flat to slightly down with 3.6 billion shares of the S&P 500 stocks trading; trading on the NYSE was down 2% and down 6% on NASDAQ. That relatively low volume was a positive sign, given how far down the markets traded earlier today.

My Mar iron condor stands at a P/L of +$3,000 with a position delta of -$15 and theta = +$168. The spike up in IV today took a bit off of this position, but it is essentially delta neutral with 13 days to expiration. If the bull market resumes and RUT breaks its recent high at $838, I will close the 875/885 call spreads. Otherwise, the next decision point comes next Friday. My Apr iron condor at 700/710 and 900/910 on RUT is essentially at break-even with delta = -$26 and theta = +$78.

I believe many traders were lightening up positions today to lower their global event risk over the weekend. If that was the case, and nothing dramatic happens over the weekend, we may well see some buying on Monday. We'll see.

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Written by Dr. Duke

Created: 03 March 2011

It certainly doesn't seem to me that the situation in Libya has stabilized and oil prices are certainly quite high and most analysts are still predicting higher oil prices. And the market takes off for its highest gain this year?? I guess this just underscores how difficult or impossible it is to predict the markets. SPX closed at $1331, up a whopping $23. RUT gained $18 to close at $829. But trading volume didn't rise as much as you might expect on such a strong upward push. 3.5 billion shares of the S&P 500 stocks traded, just above the 50 dma at 3.4B. Trading on the NYSE was up 3% and trading volume on the NASDAQ was up 1%.

Some positive unemployment claims data may have helped the market; 368k initial unemployment claims were reported, down from last week's 388k. Continuing unemployment claims dropped 60k to 3.77 million. The ISM Services Index came in at 59.7 for February, up from January and beating analysts' estimates.

My Mar condor now stands at a P/L of +$2,600 with delta = -$40 and theta= +$204. Now that we are getting into the last two weeks before expiration, theta is ramping up. Now all eyes are focused on tomorrow's jobs report; much of today's run may have priced in a very good number. A disappointment could be brutal for the markets.

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Written by Dr. Duke

Created: 02 March 2011

Oil prices broke through $102 today and yet the stock market traded largely sideways and even managed to close with small gains for the session. SPX closed up $2 at $1308 and RUT gained $4 to close at $811. Trading volume was down from yesterday with 3.2 billion shares of the S&P 500 stocks changing hands. Trading on the NYSE was down 11% and was also down 10% on NASDAQ.

I believe this market is caught between two strong but conflicting perspectives. On the one hand, traders are afraid that high oil prices will shut down the economic recovery and may even push us into the infamous "double dip" that was the overwhelming fear for a time last year. On the other hand, we continue to see economic data and company earnings reports that support the idea of a continuing economic recovery. Yesterday's Chicago PMI hit a 20 year high, and today, ADP reported the creation of 217k new jobs. In addition, the Fed's Beige Book was released today and reported continued economic growth and strong retail sales across the 12 Fed districts. The result is a market that breaks to the downside one day and then recovers the next. So for the time being, the market may well trade somewhat sideways with a slight upward bias, trapped between these two perspectives.

My March iron condor stands at a P/L of +$2,660 with a position delta = +$17 and theta = +$143.

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Written by Dr. Duke

Created: 01 March 2011

Continued unrest in the Middle East and Libya drove up the price of oil and that, in turn, generated selling pressure on equities. Traders are concerned about the impacts of $100 oil on the tentative economic recovery both in the US and globally. The SPX opened in positive territory but almost immediately started selling off and steadily declined all day. SPX lost $21 to close at $1306 while RUT closed at $807, down $16. Trading volume was up, with 3.7 billion shares of the S&P 500 stocks trading. Volume was also up 6% on the NYSE and up 10% on NASDAQ. If you are looking for some positive news amid today's bloodshed, it might be the fact that today's spike upward in volume was less than the first three trading sessions of last week or on "Egyptian Friday" (January 28). But I may be guilty of whistling in the dark.

Volatility (VIX) spiked back up and erased the declines of the past two days. The ISM manufacturing index came in at 61.4 for February, up from the previous month's 60.8; this is the highest level since 2004. Construction spending was down 0.7% in January, which isn't as bad as many analysts expected, given the bad weather across much of the country in January.

My March iron condor on RUT stands at a P/L of +$2,500, delta = +$26 and theta = +$140. Both spreads are over 1.5 standard deviations OTM. So this position appears to be well positioned, in spite of the current market softness. For this position we will continue to trade what the market gives us; for our directional positions, we will anxiously watch the Middle East.

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Written by Dr. Duke

Created: 28 February 2011

The markets calmed further today as the Saudis assured the world they would make up for any oil supply disruptions from Libya. Oil prices dropped to $97 and stock prices climbed modestly. The SPX gained $7 to close at $1327 and RUT rose $2 to close at $823. Volatility dropped to 18.4%. The Chicago PMI came in at 71.2, a 20 year record high. Pending home sales dropped 2.8% in January, but a decrease of 3.2% had been predicted by analysts. Trading volume increased from Friday with 3.3 billion shares of the S&P 500 trading, about 100 million shares below the 50 dma. Trading increased 17% on the NYSE and increased 8% on NASDAQ.

My Mar iron condor at 730/740 and 875/885 stands at a P/L of +$2,500 and delta = -$22 and theta = +$157 with 17 days to expiration. I was looking at the iron condors traded in this blog since June 2009 and the number of months where no adjustments were necessary stood out: only three out of 22 iron condor positions were established and closed for a gain without any hedging or rolling of spreads up or down. I position these condor positions where the probability of success is typically about 85% or better. One could draw the conclusion that 19 of the 22 positions (or 85%) should have been expected to have resulted in a profit without the need for any adjustment. But that would be naive on several levels.

The probability calculation I refer to is the probability of the spreads closing OTM, or worthless at expiration. If one had calculated the probability of one of the condor's spreads being ITM at any time before expiration, you would have been surprised by the results. The probability of the condor's spreads expiring OTM at expiration includes many events where one of the spreads moves ITM and then back OTM before expiration. Assuming you employ any kind of risk management, you are not going to sit by and watch the index move into or even past your spreads without taking action - that would be foolish and could be very expensive. So even if we were to assume that the calculated probabilities would always match trading reality (they won't but that is another topic of discussion), we will have to hedge or adjust our condor positions much more often than the calculated probabilities would suggest. Thus, a robust system of risk management is not just a good idea; it is essential for your trading success.

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Written by Dr. Duke

Created: 26 February 2011

Is it safe to go back in the water? Markets generally traded upward Friday with the SPX running up $14 to close at $1320 and RUT closing at $822, up $18. Even more impressive was the intraday chart; SPX never traded for a loss at any time; it was almost a straight upward progression with the exception of some hesitation late morning. Traders focused on reassuring comments about oil supply coming out of Saudi Arabia; this dropped the spot price of oil and calmed the stock markets. Although it wasn't all rosy; the Dow and NASDAQ both ended the day unchanged. From my perspective, we have a market that is a bit scared (Middle east, Libya, Euro debt, etc.) and yet sees primarily good news in the US - earnings reports are positive, economic data point to a recovery, albeit slow, etc. So the market as a whole is ambivalent. Hence, we are nervous even on a day like Friday as the markets generally head higher. The VIX hit a high over 23% two days ago, but closed down at 19.2% Friday. Trading volume dropped off significantly on Friday with 3 billion shares of the S&P 500 trading. This is well below the 50 dma at 3.4B. It was the only below average day this week. Trading volume on the NYSE dropped 23% and declined 11% on NASDAQ.

Fourth quarter GDP growth was revised downward to 2.8%, below economists' estimates, but the consumer sentiment survey from the University of Michigan came in at 77.5 for February, up from 75.1 last month. So economic news was mixed, but traders were focused on oil and the price of oil was down.

I took today's market strength as an opportunity to close the 690/700 put spreads in my Mar iron condor on RUT. I closed them for $0.23, confirming a gain of $1,040 (20 contracts). This brings our Mar iron condor on RUT at 875/885 and 730/740 to a P/L of +$2,260 with a position delta of -$25 and a position theta of +$144. Now we wait to see if any more bad news hits the markets for Monday morning.

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Written by Dr. Duke

Created: 24 February 2011

Oil prices and rioting in Libya were almost the only focus of the financial news outlets today. Oil stayed near $99 throughout the day, but declined to $97 late in the day. That seemed to calm the equity markets a bit. SPX broke through the $1300 line many were watching (including me), but after touching $1294,  it recovered most of the day's losses to close down one dollar at $1306. RUT fared better, gaining $5 to close at $804. RUT also traded down to find support at $795 before rebounding in late afternoon trade. Both indexes appear to be consolidating to form a bottom here, but any negative news out of Libya will change that posture quickly. Many of the market leading stocks are posting a similar pattern of either establishing a new support level or pausing at an old support level; take a look at AAPL, GOOG, GS and NFLX. That isn't to say that this evening's news from Libya may not take the market lower. But absent that news, stocks appear to be finding support. Trading volume was down from the high levels of the past two days, but still above average; 3.9 billion shares of the S&P 500 traded today, down from yesterday but above the 50 dma. Trading was up 1% on the NYSE and down 16% on NASDAQ.

Today's economic news was a mixed bag, but the market ignored it in any case. Initial unemployment claims went down to 391k from last week's 413k, while continuing claims rose by 55k to 3.8 million. Durable orders increased 2.7% but new home sales in January dropped to 284k from December's 325k.

My "mixed bag" March iron condor on RUT stands at a P/L of +$2,020, position delta = +$56 and theta = +$128. I am waiting to close one of my put spread positions for a profit, but the recent rise in IV has made that more difficult. So we watch and wait patiently for the market to make its move.