Dr. Duke's Blog

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Written by Dr. Duke

Created: 08 October 2010

Initially the market faltered on the news of a loss of 94 thousands jobs and unemployment remaining at 9.6% in the September nonfarms payroll report. But then the consensus view saw this bad news as good news because it would likely prompt the Fed to further intervene via additional quantitative easing. This viewpoint sent the dollar plunging and that in turn helped the stocks rally strongly. It was certainly a surprising interpretation of the jobs report for me - but, I don't claim to be able to predict the market's twists and turns. The SPX rallied $7 to close at $1165 while RUT ran even harder, closing at $694, up $10. Trading volume was flat to modestly higher, depending on the exchange. Volume was only up 2% on the NYSE, but it was up 9% over at NASDAQ. Trading in the S&P 500 stocks was flat at 3.2 billion shares, just below the 50 dma.

My limping Oct condor was crushed by today's move. I didn't help matters when I removed the long Nov hedges this morning as the market dropped. I closed half of my 700/710 call spreads and will close the remaining call spreads next week. The only remaining question is to determine the size of the loss for October. I also removed the hedges on my Nov condor, but that was of minimal consequence for that position. However, by the end of the day, the short Nov $740 calls closed with a delta of 21, so this position will require more surgery next week, absent a pull back.

Enjoy your weekend.

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Written by Dr. Duke

Created: 07 October 2010

Markets traded mostly sideways today with most traders focused on the nonfarm payroll report tomorrow morning. Initial unemployment claims reported essentially flat week to week at 445k and continuing claims decreased by 48k to 4.5 million. However retail sales appear to be making solid gains and that news appeared to offset the lack of improvement in the unemployment claims data. RUT lost $1 to close at $684 while SPX lost $2 to close at $1158. Trading volume declined across the board with 3.2 billion shares of the S&P 500 stocks changing hands. Trading on the NYSE dropped 5% and it declined 12% on NASDAQ. The dollar recovered somewhat today and that pressured gold prices. With bond yields at record lows, there is a lot of money on the sidelines considering whether it is safe to buy stocks. It is impossible to predict what piece of news, or more importantly, the interpretation of that news, will push this market one way or the other. Alcoa's earnings announcement certainly wasn't very encouraging with a 21% drop in earnings; however, they beat analyst expectations, so that may be a positive boost for stocks tomorrow.

The situation with my Oct and Nov iron condors on RUT is largely unchanged. Both are underwater and susceptible to a strong move upward. Both positions are hedged and we'll see what the jobs report does to the markets tomorrow.

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Written by Dr. Duke

Created: 06 October 2010

The markets cooled today after seeing the loss of 39 thousand jobs in the ADP payroll report for September. Economists were expecting an increase of 18k. This has exacerbated concerns about Friday's nonfarm payrolls report; the consensus prediction from the experts is for an increase in unemployment to 9.7% and some are speculating it may go higher. Tomorrow's unemployment claims report may push the market somewhat but most traders will be waiting for Friday's jobs report before taking on additional long positions. Markets opened downward this morning and traded sideways throughout the day with only modest net changes in the market indexes. SPX closed down less than a dollar at $1160 while RUT lost $4 to close at $685. Trading volume decreased across the board with a decline to the 50 dma at 3.4 billion shares for trading in the S&P 500 stocks; similarly, trading was down 18% on the NYSE and down 5% on NASDAQ. Gold hit record highs today, reflecting continued concerns about governments debasing their currencies both to stimulate exports but also to solve their sovereign debt problems.

My iron condors for Oct and Nov are both underwater and hedged appropriately. The Oct condor's position delta = -$40 and theta = +$173, representing a reasonable net level of risk. November's Greeks are delta = -$32 and theta = +$54. Both theta/delta ratios are good to fair, especially in light of the hedge options in both positions. A strong market move upward is the danger to both positions; uncertainty concerning Friday's jobs report will likely contain any market advances tomorrow, but on Friday? But, as delta neutral traders, we have hedged our positions; if the market moves up strongly, that will likely lock in a net loss for our October condor, but the hedges should contain that loss.

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Written by Dr. Duke

Created: 05 October 2010

Expectations of additional quantitative easing by the Fed drove the U.S. dollar to an eight month low and fueled a broadly based market surge on strong volume. SPX ran up $24 to close at $1161 while RUT ran up $20 to close at $689. Trading volume in the S&P 500 stocks hit 4 billion shares, only matched recently on the September option expiration Friday over two weeks ago. Trading volume was also up 26% on the NYSE and up 17% on  NASDAQ. The ISM Services Index reported out at 53.2 for September, up from last month's 51.5. The VIX has been in the range of 21% to 24% for the past several weeks and pulled back to 22% today.

I hedged both of my iron condors today, but the Oct position is in serious trouble with delta = -$38 and theta = +$109. Trying to salvage a gain in this position yesterday may be my undoing. This bull market is threatening to bulldoze over my 700/710 call spreads. The November condor is hedged by December $740 calls and has a position delta of -$32 and theta = +$57.

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Written by Dr. Duke

Created: 04 October 2010

The stock markets opened weak and traded down all morning, then meandered sideways for the afternoon. However, trading volume was weak, suggesting the institutions are sitting on the sidelines with no serious selling ongoing. Trading in the S&P 500 stocks dropped to 3.1 billion shares while trading on the NYSE dropped 12%; to a lesser degree, trading on NASDAQ was down 2%. SPX traded down to $1132, near its recent support level at $1131 before bouncing back to close at $1137, down $9. RUT behaved similarly, trading down as low as $666, near its peak back in late July before the drop in August; RUT closed down $10 at $669. The SPX support level of $1131 is worth watching closely because the next levels of strong support are quite a bit lower at $1100 and $1040.

Factory orders for August fell 0.5%; this may have set the negative mood on the street today. But pending home sales surprised analysts by increasing 4.3%; analysts were expecting 1%.

I took today's weakness in RUT as an opportunity to attempt to salvage my Oct iron condor on RUT. I had closed the 690/700 calls and rolled to 720/730 last week. I was able to close the 720/730 spreads for a $1,020 profit and roll down to 700/710 today. That position now stands at a P/L of -$2,063, delta = -$70 and theta = +$337. The Nov condor stands at a P/L of -$600, delta = -$50 and theta = +$92. Both positions have strong theta/delta ratios but the Oct position theta is really starting to come on strong as we enter the last ten days before expiration.

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Written by Dr. Duke

Created: 01 October 2010

Several positive economic reports appeared to give the market a upward edge today, but the trading was choppy and mostly sideways. SPX closed up $5 at $1146 and RUT closed at $679, up $3. Trading volume was generally down from yesterday with 3.6 billion shares of the S&P 500 stocks trading today, but this is still above the 50 dma. Trading volume was down 8% on the NYSE and down 20% on NASDAQ. Personal income rose 0.5% and the final revision of the Michigan Consumer Sentiment report came in higher at 68.2 (66.6 last month). Construction spending for August was up 0.4%, a big improvement from July when it was down 1.4%.The ISM manufacturing index dropped from 56.3 to 54.4 for September.

SPX remains in a tight trading range from $1131 to $1150 and has been unable to hold a close outside that range. My Oct iron condor continues to improve its position with the passage of time; now it stands at -$2,723, delta = -$47 and theta = +$229. Both spreads are greater than one standard deviation OTM. The Nov condor has a P/L of -$1,360, delta = -$70 and theta = +$88.

My decision to roll my calls and puts in the Oct condor earlier this week bears some scrutiny. At this point, one might argue that this market is range bound and that a breakout downward may be more likely than a breakout upward. I was being conservative by closing and rolling the spreads; now that I have closed the November hedge calls, the best this position can do is a modest loss. But remaining in the previous position was exposing me to an upward breakout and a larger loss; the Nov hedges help contain the losses, but it isn't a perfect hedge. Trading the iron condor, like any trading strategy, is subject to your personal judgment. We may well make different decisions about when and how to hedge the position. The key is to be sure you are using a consistent system of risk management.

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Written by Dr. Duke

Created: 30 September 2010

A flurry of end of the quarter trading pushed volume higher today but trading was largely sideways for the day. The SPX closed the day down $4 at $1141 while the RUT lost less than $2 to close at $676. The markets traded higher this morning on the basis of some favorable economic reports. Initial unemployment claims dropped 16k to 453k while the continuing unemployment claims dropped 83k to 4.46 million. The Chicago PMI rose to 60.4 from last month's 56.7 and the revised estimate of second quarter GDP rose a bit to 1.7% from 1.6%. Tradng volume was up across the board with an 18% increase on the NYSE and a 17% increase on NASDAQ. Trading in the S&P 500 stocks rose above the 50 dma to 3.7 billion shares.

I closed the Nov hedge options in my Oct iron condor on RUT this morning. This position is now in salvage mode; it will end in a small loss at best. The current Greeks are excellent with delta = -$9 and theta = +$229. The Nov condor stands at a P/L of -$1,160 with delta = -$60 and theta = +$85. The delta of the $740 calls pulled back to 16 today so there was no need to adjust this position as yet.

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Written by Dr. Duke

Created: 29 September 2010

All of the major indexes closed down modestly today, with the exception of RUT, the index I wanted to pull back a bit! Stocks opened weakly this morning but then recovered and traded near the unchanged mark for most of the day. SPX closed at $1145 for a $3 loss, but RUT gained $2 to close at $678. Trading volume was flat to down for the day with a 5% drop on the NYSE and a 2% drop on NASDAQ. Trading in the S&P 500 stocks rose slightly to the 50 dma at 3.4 billion shares. Some of the news coming out of Europe regarding sovereign debt and the European banks banks has been unsettling and probably accounted for today's weak market in the absence of any significant economic news.

My Oct iron condor has been teetering on the brink of major adjustment for several days if not weeks. Today's strength in RUT pushed me to act. Buying the Nov $690 calls gave me time to wait for RUT to either pull back or at least just trade sideways, but I decided it was just not prudent to wait any longer. I closed and rolled my 690/700 call spreads to 720/730 and closed and rolled my 540/550 put spreads to 610/620. The position remains underwater, but this improved the position Greeks markedly to a delta of +$56 and theta = +$189. At this point, we are in salvage mode. Depending on the outcome of our Nov $690 call hedges, we will either break even or incur a small loss. But the condor trader always looks at the big picture - we made $2,590 last month, so if we break even or lose four or five hundred dollars this month, that's ok. The crucial success factor is to manage the risk so we never incur the large debilitating loss. Our Nov condor sits at a P/L of -$1,360 with delta = -$65 and theta = +$82. If RUT continues upward, we may be adjusting that position as well since the delta of our Nov $740 calls is up to 18.

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Written by Dr. Duke

Created: 28 September 2010

Before the market opened, the futures were positive, suggesting a strong open for the markets, but it was short-lived. The September Consumer Confidence Index didn't help, coming in at a seven month low. Traders were encouraged by some comments from some of the European banks, suggesting some help for the European sovereign debt problems. This caused the Euro to rally against the dollar, which hit several month lows today. The Case Schiller Home Price Index came in essentially flat for July. RUT and SPX tested their support levels this morning; SPX traded as low as $1132 (support at $1131) and RUT traded down to $659 before rebounding. By noon the markets had fought their way back to the unchanged mark, but a strong rally in the last hour resulted in gains for all of the market indexes. SPX closed up $6 at $1148 and RUT closed at $675, for a $7 gain. Trading volume increased over yesterday with a 19% increase on the NYSE and a 13% increase on NASDAQ. The S&P 500 stocks traded 3.3 billion shares, just below the 50 dma at 3.4 billion shares.The SPX is still trapped in the trading range between $1131 and $1150; a break out through either of those figures will merit your attention.

My Oct iron condor on RUT stands at a P/L of -$2,573, delta = -$112 and theta = +$110. The theta/delta ratio is essentially at one to one, suggesting we are at the edge of making some serious adjustments. The delta of the Oct $690 calls is 35 and the 540/550 put spreads can be closed for less than $0.20. If RUT drops back into its trading range tomorrow, I will leave the position as is. The Nov $690 calls are buying us time for RUT to pull back or trade sideways. The Nov RUT 520/530 and 740/750 iron condor stands at a P/L of -$1,140 with delta = -$63 and theta = +$81.

So we continue to watch a market that cannot quite decide which direction it wishes to take. These are interesting times for traders.

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Written by Dr. Duke

Created: 27 September 2010

Today was a slow news day and the markets just traded sideways most of the day with low volume. The major indexes might have closed unchanged if not for a sell-off in the last hour, resulting in all major indexes closing for modest losses. SPX closed down $7 at $ 1142 while the RUT lost $3 to close at $668. SPX appears to have established $1150 as its new resistance, so a breakout above $1150 and a breakdown below $1131 would be signs to watch for. All of this choppy trading occurred with low volume. Trading was down 17% on the NYSE and down 5% on NASDAQ. Trading in the S&P 500 stocks dropped to 2.8 billion shares, down from Friday's trading right at the 50 dma of 3.4 billion shares. A few individual stocks are moving upward, like GOOG and AAPL, but generally the markets appear stalled here with most traders on the sidelines.

My Oct iron condor is hedged with Nov calls and sitting in fair condition with a P/L of -$2,093 with position delta = -$92, and theta = +$141 on 20 contracts. The 690/700 call spreads are sitting at 0.6 standard deviations OTM while the 540/550 put spreads are over 3 standard deviations OTM with 17 days to expiration. I established the Nov RUT 520/530 and 740/750 iron condor last week for a credit of $2,740 on 20 contracts. It now stands at a P/L of -$800 with a position delta of -$48 and a position theta of +$78. The Jan 2011 270/300/330 call butterfly I recommended to my trading group in July is now up 62% - the market may be stalled, but AAPL is moving!