Dr. Duke's Blog

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Written by Dr. Duke

Created: 24 January 2011

Large technology names like AAPL and GOOG made some nice gains today and led the broader market higher. IBM's bullish run since its positive earnings announcement last week has driven the Dow close to breaking the $12k level. SPX closed up $7 at $1291 and RUT closed at $779 for a $6 increase. Today's price action was certainly encouraging to the bulls, but SPX really needs to break through the high set last week at $1296 to confidently establish itself as having returned to the bullish uptrend. However, those market analysts looking for a healthy correction can't be too comfortable because last week's weakness didn't really qualify as a correction. Additional data on the bearish side of the camp would be the lower volume on today's positive price action. The market surged pretty strongly across the board, but trading volume was down. Only 3.2 billion shares of the S&P 500 traded, below the 50 dma. Trading was down 25% on the NYSE and was essentially flat (down 1%) on NASDAQ. No significant economic news was out today; the FOMC starts its meeting tomorrow and will issue a statement Wednesday. Nothing new is expected from the FOMC but the risk of a surprise can't be ignored.

My Feb RUT iron condor at 680/690 and 860/870 stands at a P/L of +$2,260 with delta = +$15 and theta = +$69. Some have asked me why I don't roll up the put spreads in this position to sweeten the potential gains. Normally that would be a possibility, but I have been concerned about a possible down turn in this market after having such a strong bullish run, and I felt more comfortable with that large safety margin on the downside. In addition, it is looking more probable each day that I can possibly come close to the full maximum gain for this position of $3300 on 20 contracts. That's about 20% on the capital at risk - that is an excellent gain. I don't want my greed to risk compromising that gain.

Watch tomorrow's open to see if this bullish run can continue. Strong follow through that pushes SPX above $1300 would be very bullish.

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Written by Dr. Duke

Created: 21 January 2011

In spite of stellar earnings reports, AAPL and GOOG have been trading off for the last couple of days. NASDAQ has lost ground for three days in succession. The S&P 500 (SPX) gained $3 to close at $1283 while RUT continued its losing streak to close at $773, down $5. In 2010, RUT outperformed SPX very consistently - not so this year. Trading volume was mixed; trading in the S&P 500 was flat at 4 billion shares; trading was up 5% on the NYSE but down 17% on NASDAQ. The market action on SPX has been interesting the past two days. Yesterday's price action revealed the classic hammer candlestick; the hammer often signifies the reversal of a downward trend since the market trades down, but finds buyers and trades back up, leaving the long lower shadow of the candlestick. Today's shooting star candlestick is essentially the opposite signal: the market trades up, but sellers take it back down to close near its open. That often signifies the reversal of an upward trend. Having these two signals back to back tells me this market is in stalemate between the bulls and the bears; neither group seems to be able to move decisively and make it stick. But that also means we may be subject to a big move one way or the other if pushed by the right piece of news or economic data. I had begun to establish some of my Feb spreads this week, but chose hold off on placing any additional directional trades today. I will give this market another day or two to settle down.

SPX settled at $1289.25 so my Jan SPX 1210/1220 put spreads expired worthless. This confirms the net loss of 5% for the Jan SPX iron condor. The Feb iron condor on RUT stands at a P/L of +$2,000 with position delta = +$20 and position theta = +$67 (on 20 contracts). For those of you with Jan condors on RUT, the settlement price = $782.92.

Have a nice weekend.

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Written by Dr. Duke

Created: 19 January 2011

Many of us have been expecting a pull back for some time but it seemed that every moment of weakness in the market was met with renewed buying.The markets opened down a bit this morning and about 10 am ET, it appeared that the buyers were going to buy the dip once again, but then the markets turned south and never looked back. SPX lost $13 to close at $1282 while RUT was hammered with a $21 loss to close at $787. Trading volume was above average but lower than yesterday with 3.4 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE was down 5% but it was up 5% on NASDAQ. Housing starts for December fell 4.3% to 529k; 550k were expected. But December's building permits jumped 17% to 635k, the highest level since March 2010.

It isn't clear to me what precipitated this sell off. AAPL's and IBM's earnings announcements were stellar. GS's earnings beat expectations but they missed on revenues. There wasn't any obvious dreadful news to account for the selling. I was busy with some other work and had CNBC muted all day; I should have tuned in; I am sure the talking heads had some nice packaged answers.

My Jan SPX iron condor has been teetering on the edge of disaster for a few days, so when the market dipped a bit this morning, I took the opportunity to close my 1300/1310 call spreads. Of course, if I had waited, I could have safely allowed those spreads to expire worthless. Assuming the 1210/1220 put spreads expire worthless, this position will lose $899 on 20 contracts or 5%. I hate that rear view mirror.

My Feb RUT iron condor is now in nearly perfect position with a P/L of +$1900, delta = -$14 and theta = +$81. And that sums up delta neutral trading rather well - some trades work out as planned and some don't. The trick is minimizing those inevitable losses. It is disappointing to start the new year with a loss, but our returns on the Feb condor may easily compensate for the losses in January. And that underscores the importance of risk management.

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Written by Dr. Duke

Created: 18 January 2011

It seemed as though there were no other stocks trading today. APPL was the topic of almost every analyst on CNBC. Of course, we expected some attention with the earnings announcement this evening, but the announcement of Steve Jobs taking a medical leave added a new layer of questions and speculation. AAPL opened at $330 this morning and traded as low as $326 before bouncing and recovering most of its losses, closing at $341. In after hours trading, AAPL was trading up to $355 after blowing away the earnings and revenue estimates, but was pulling back as I write this blog. After watching AAPL bounce off $326 this morning, I entered my February 310/320 call spread and was already up 17% at the close. GOOG was another stock worth watching today; while the overall market was trading sideways, GOOG gained $15 to close at $640 - very bullish action. I put on a calendar spread to take advantage of GOOG's ramp-up in IV before their earnings announcement Thursday.

The overall market wasn't nearly as exciting with choppy sideways trading most of the day. SPX closed up $2 at $1295 and RUT closed unchanged at $808. Trading volume was up with 4.7 billion shares of the S&P 500 stocks changing hands (the 50 dma = 3.4B). Trading volume increased 9% on the NYSE but was flat on NASDAQ.

My Jan iron condor on SPX is teetering on the brink of a loss for this first month of the new year. This position's theta hit $1363 today which erases a lot of position losses, but the SPX is breathing down the neck of the 1300 calls. The Feb iron condor is in excellent position with a P/L of +$800, delta = -$72, and theta = +$121.

The bears and bulls appear to be basically balanced at this point with neither camp able to take control of the ball. The largest concern appears to be the European sovereign debt issue at this point since most of the economic data here at home is consistently pointing to recovery, albeit a slow recovery. My crystal ball just clouded over, so I'm not sure what we have in store. So I will just trade what the market gives me.

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Written by Dr. Duke

Created: 14 January 2011

Our markets opened down this morning, primarily in response to losses in overseas markets, but by about 10:30 am, the markets began a steady climb upward, led by the financials. SPX closed the day at $1293, up $9 while RUT gained $7 to close at $808. The Consumer Sentiment Survey from the University of Michigan reported 72.7 for January, down from December's 74.5 and below expectations. The December Consumer Price Index (CPI) rose 0.5% in December, higher than expected and also in line with the higher than expected PPI earlier this week. These numbers caused some concern about inflation beginning to grow. But while this economic data stoked some anxieties, JPM's earnings report beat expectations and this appeared to energize the markets.

I decided to keep the call spreads of my Jan SPX condor open until after the long weekend to benefit from the additional time decay, but that could be a costly mistake if this bullish run continues Tuesday. The Feb RUT condor is well positioned with P/L of +$680, delta = -$72 and theta = +$101. The trades from my trading group continue to perform well. I closed the NFLX Jan 165/175 call spread today for a 30% gain and our NVDA calls are up over 300%. The trading group track record now stands at +55% since the group started in April last year.

Google a copy of Martin Luther King's "Dream" speech and read it this weekend. I think you will be impressed.

Enjoy the long weekend!

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Written by Dr. Duke

Created: 13 January 2011

Unemployment claims took an unexpected jump this morning and that appeared to set the tone for a sideways trading day. Initial unemployment claims came in at 445k, up from last week's 410k. While continuing unemployment claims dropped to 3.88 million from last week's 4.13 million, most analysts dismissed that as being the result of unemployment benefits expiring rather than claimants finding new jobs. The Producer price Index (PPI) increased 1.1% in December, raising inflation concerns with some analysts. The markets traded largely sideways on flat volume in the face of these economic reports. SPX closed down $2 at $1284 and the Russell 2000 Index (RUT) closed at $801 for a loss of less than one dollar. Trading in the S&P 500 stocks was up slightly from yesterday at 3.6 billion shares; trading volume declined 3% on the NYSE and increased 3% on NASDAQ.

My Jan SPX iron condor is still teetering on the edge with a P/L of -$1739, delta = -$217 and theta = +$358. The 1200/1210 put spreads are greater than two standard deviations OTM, but the $1300 calls have a delta of 25. My Feb iron condor on RUT is standing at a gain of $640, with delta = -$63 and theta = +$106.

Before the opening bell in the morning, traders will be watching for the earnings announcement of J.P. Morgan Chase (JPM); this could set the tone for Friday's trading. The financials led the bull run in December and could be expected to continue that leading role if this bull market is destined to continue higher.

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Written by Dr. Duke

Created: 12 January 2011

Successful debt auctions yesterday in Greece and today in Portugal reassured traders and the markets traded in positive territory all day. SPX ran up $11 to close at $1286 and RUT closed at $801, up $7. Trading volume edged up a little with 3.5 billion shares of the S&P 500 stocks trading; this is slightly above the 50 dma. Trading was up 3% on the NYSE but down 1% on NASDAQ. The Fed's Beige Book was released today, but it didn't reveal anything new - just more anecdotal evidence of a slowly recovering economy.

My SPX Jan iron condor is being pressured on the call spread side as we get down close to the wire. The January position's Greeks deteriorated significantly today with delta = -$220 and theta = +$253. Absent a pull back, I will have to close the call spreads early. My Feb iron condor on RUT stands at a $580 gain with delta = -$58 and theta = +$102.

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Written by Dr. Duke

Created: 11 January 2011

The markets started the morning in positive territory but selling pressure quickly turned the tide. But the bulls reasserted themselves and recovered the losses before the market closed this afternoon. The earnings announcement season officially started last evening with Alcoa. Although Alcoa reported better than expected earnings, profit taking took the stock back a bit today. The earnings announcements and the sovereign debt problems in Europe are being watched closely by traders. The market appears to be teetering back and forth with neither the bulls nor the bears able to take control. SPX traded as low as $1270, but closed up $5 at $1274. RUT traded up $3 to $795. Trading volume pulled back a bit today with 3.2 billion shares of the S&P 500 changing hands. Trading volume declined 2% on the NYSE and increased 2% on NASDAQ.

My Jan SPX iron condor stands at -$1139, with delta = -$95 and theta = +$424. Theta is really starting to ramp up now that we are less than two weeks to expiration. The Feb condor on RUT stands at a gain of $780 with delta = -$48 and theta = +$97. The market is caught between the downward pressures of a slow economic recovery and sovereign debt concerns, and the upward pressures of the Fed's QE II and and a large amount of cash coming out of bonds into equities. So far, a clear direction has not revealed itself. Although I would argue that the bias is to the upside. In recent trading, every market dip has been met with buyers, as it was today. We'll see.

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Written by Dr. Duke

Created: 10 January 2011

I'm sorry I missed getting my blog out earlier today. A friend entered the hospital this afternoon and I am just returning home. A brief observation on the markets: notice how strong the support level appears to be at about $1260 on SPX. Once again today, the buyers appeared when the market neared that level. I conclude that if or when SPX breaks $1260 going down, it may get ugly in a hurry.

My Jan SPX iron condor is nearing break-even with a P/L of -$439, delta = -$84 and theta = +$270. The Feb RUT condor stands at a P/L of +$600, delta = -$30 and theta = +$92. Have a pleasant evening. I will check back in tomorrow.

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Written by Dr. Duke

Created: 07 January 2011

Early this morning, I looked at Yahoo Finance and was surprised to see a headline to the effect that the "world" was waiting on the U.S. Non-Farm Payroll Report. This jobs report seemed to take on even greater significance as we enter the new year and everyone is focused on determining which way the markets are headed. The jobs report was actually reasonably positive with a reduction in the unemployment rate to 9.4% and an increase of 113k jobs, but that improvement wasn't as dramatic as the market was expecting. Given that the consensus from economists was an unemployment rate increase to 9.8%, this report appeared positive to me at first blush. Bernanke's testimony to Congress this morning was conservative (he is a banker, after all), stating his expectation for continued economic recovery in 2011 but at a slow pace and with only modest improvements in the unemployment rate. For the first time this week, trading volume was flat with 4.2 billion shares of the S&P 500 stocks trading; trading volume was flat on the NYSE and dropped 6% on NASDAQ. The SPX dropped $2 to close at $1272 while RUT closed at $788, down $4. SPX was down as far as $1262 this morning before bouncing back and recovering most of its losses before the close.

Today's trading reaffirmed the $1260 support level on SPX that proved so difficult to break through as resistance in December. The other significant change in this first week of trading in 2011 was the relationship of trading in RUT vs. SPX. RUT outperformed SPX consistently throughout 2010, but has lagged SPX several days this week. Take today as just one example. SPX dropped 0.9% from the open to its low around noon today and closed down $2 or less than 0.2%. But RUT dropped 1.9% from the open to its low and closed down $4 or about 0.5%. The SPX/RUT relationship has reversed. Is this a leading indicator of a turn downward as traders seek the larger blue chips for safety? I don't know. But it does suggest that trading delta neutral strategies on RUT may not be as difficult in 2011 as it was last year.

I removed the hedges on my Jan SPX iron condor this morning; at the close, this position was underwater by $1439 with a position delta = -$73 and position theta = +$245. Time decay is really starting to accelerate as we enter the last two weeks of this position's life. But the $1300 calls are still uncomfortably close to the index price (their delta = 17). However, SPX has traded upward over $76 since we established the Jan condor. So we are doing well to still be in the trade with a potential gain of over $2000 remaining. By contrast, the Feb RUT iron condor is very nicely positioned and stands at a P/L of +$540 with delta = -$28 and theta = +$90. The short $860 call stands at delta = 8 while the short $690 put stands at a delta of 9.

The first week of trading in 2011 is now over and what do we know? It appears we remain caught in a stalemate between the bulls and the bears. So far, neither camp has been able to control the game.