Dr. Duke's Blog

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Written by Dr. Duke

Created: 24 September 2010

The markets jumped up at the open and never looked back. The major indexes just steadily climbed upward all day. The SPX closed at $1149, up $24 on the day. RUT gained $22 to close at $671. Before the market opened, durable good orders were reported for August as down 1.3% but analysts were expecting a decline of 1.4% - does that make for buying euphoria to you? Later in the morning, new home sales were reported as flat month on month - again, not terrible, but hardly optimistic. But the run upward continues to occur on modest volume; trading in the S&P stocks increased slightly to 3.5 billion shares, right at the 50 dma. It just goes to show that the herd can just begin to move in one direction for no obvious reason, and you had best not try to stand in the way; all of your excellent analysis will just be trampled.

Of course, this run upward hurt my Oct iron condor, that now stands at a P/L of -$2,163 with delta = -$105 and theta = +$87. If this run continues next week, we may have to do some surgery on this position.

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Written by Dr. Duke

Created: 23 September 2010

Disappointing news from Europe sent the futures into negative territory this morning. Then the initial unemployment claims data came in with a decline of twelve thousand but the market was expecting a larger decline. Continuing unemployment claims declined 48k to 4.489 million. On the positive side of the news, existing home sales for August increased 7.6%. The net result was a weak start to the markets today with choppy trading around the unchanged line through most of the day, but the sellers started taking profits this afternoon and drove the markets to losses across the board. SPX broke through support at $1131 to close down $9 at $1125. The next well defined support level on the SPX is down at $1040, although it could find support at the 50 dma at $1098. RUT lost $8 to close at $649. All of this trading occurred with lower volume with the NYSE flat and the NASDAQ down 12%. Trading in the S&P 500 stocks declined a bit to 3.3 billion shares.

Today's market retreat allowed me to close the hedges on my Oct RUT 540/550 690/700 iron condor. The delta of the $690 calls is now back to 16. This position now stands at a P/L of -$585 with delta = -$95 and theta = +$188. The theta/delta ratio is pretty good at roughly 2 to 1, but the relatively large delta tells us we are still in some danger from a run upward in RUT. This position still retains the potential to make nearly $2,955 or 17% (on 20 contracts). That is somewhat surprising since the RUT has tormented us by its volatility right at the edge of my adjustment trigger; I have bought and sold Nov hedge options four times in the past four weeks. The rolling up of our put spreads helped cover the cost of those adjustments. So now we return to trying to find some rational cause and effect in this market - good luck! That's the advantage of the delta neutral trader - he has thrown away his crystal ball!

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Written by Dr. Duke

Created: 22 September 2010

After the build-up to the Fed announcement yesterday, the markets just wandered sideways and downward today with little economic data to propel them one way or the other. Buying late in the day took the markets off of their lows. SPX closed at $1134, down $6. SPX traded down to its support level at $1131, but bounced up a bit for the close. RUT also traded down $8 at $657; in a similar pattern to SPX, RUT traded down to $653, the support level formed by the consolidation pattern last week, but rebounded slightly. Trading volume was flat to declining from yesterday; Trading in the S&P 500 stocks held at the 50 dma of 3.5 billion shares. Trading volume was down 10% on the NYSE but up 4% on NASDAQ.

My October RUT iron condor is still sitting basically where it was, right at the edge of adjustment; the Nov $690 call hedges are still in place. The P/L now stands at -$1,385 with delta = -$51 and theta = +$148. Today's pullback of RUT lessened the pressure, but this position isn't out of the woods yet. This market appears to need some significant news or data to push it one way or the other. Absent that, it may just chop sideways for a while. Yesterday's reaction to the FOMC report is a good example. Early reactions went in both directions, but eventually settled largely unchanged. Today's action was downward, but held support. Of course, the beauty of delta neutral trading is not being required to predict the market's direction. I just need a well defined system of risk management to deal with what the market gives me.

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Written by Dr. Duke

Created: 21 September 2010

The collective market appeared to hold its breath this morning waiting on some significant news embedded in the FOMC announcement. Immediately after the announcement, the talking heads started reading the tea leaves and the markets gyrated back and forth, but all of the major indexes closed down a bit on the day (except the Dow which is essentially unchanged, up $7). SPX closed at $1140, down $3 while RUT lost $5 to close at $665. SPX is holding above the significant resistance at $1131 it broke yesterday and RUT is holding just below the highs it set in mid-June and late July. So, it appears the market has stalled here. The Fed announcement didn't appear to say anything new. Bernanke and company have been talking about additional "quantitative easing" for some time now, but it all appears to be talk so far. Plus, I read considerable debate questioning the Fed's ability to actually prop up the markets. Many believe the FOMC language is designed to instill confidence and nothing more. So we sit and wait for some news event to push the market one way or the other. But don't be deceived by this market recent run upward; 27 states reported higher rates of unemployment in August. We are not out of the woods yet.

Our Oct position remains in jeopardy, but the delta of our Oct $690 calls has pulled back to 29, so I have decided to hold the call spreads open for now. The Oct iron condor stands at a P/L of -$2055 with position delta = -$69 and theta = +$113. A stalled market such as this is perfect for condor traders; it is just unfortunate it chose to stall so close to my call spreads.

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Written by Dr. Duke

Created: 20 September 2010

The markets opened weakly this morning but then gathered strength and never looked back. There wasn't any economic data or other news to point to as the reason for the moves; some analysts saw the strong moves in Europe's markets as starting the trend. In any case, the move was typical of the market for the past several sessions: positive movement but on weak volume. The SPX closed at $1143, well above above its resistance level at $1131 and up $17 on the day.  RUT closed at $670, up $19. Both indexes closed near their highs for the day. But trading volume fell across the board. The S&P 500 stocks traded 3.1 billion shares, well below the 50 dma. Trading on the NYSE dropped 37% and trading dropped 18% on NASDAQ. The FOMC will make its interest rate announcement tomorrow and we will receive some housing start data as well. We'll see if this bullish trend can continue. The light trading volume makes it hard to take this bull market very seriously.

My Oct iron condor position was stretched very thin by this move today. Even with help from the Nov $690 call hedges, the position is underwater by $2,500 with position delta = -$90 and position theta = +$97. The theta/delta ratio is adequate, but the delta of my short Oct $690 calls is up to 32 - time to get out of Dodge! Unless we get a pull back tomorrow, I will be closing and rolling call spreads.

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Written by Dr. Duke

Created: 17 September 2010

The markets opened with some enthusiasm this morning and SPX broke through its strong resistance at $1131, but it was short lived. The S&P 500 index pulled back and traded near unchanged for most of the day, closing at $1126, up less than a dollar. RUT traded up, pulled back and then traded mostly sideways, but managed to close up $4 at $651. Trading volume on this expiration Friday was expected to be high and it didn't disappoint; trading in the S&P 500 stocks jumped to 4.2 billion shares, well above the 50 dma at 3.5 billion shares. Trading on the NYSE was up 72% and volume was up 36% on NASDAQ.  The University of Michigan consumer sentiment survey was down a bit from last month at 66.6 and the Consumer Price Index was up 0.3%, as predicted by most analysts. So the economic data didn't really surprise anyone, but it didn't give anyone the incentive for a buying spree either.

My Oct RUT iron condor spreads now stand at a P/L of -$125, position delta = -$104 and position theta = +$115. The delta of the short Oct $690 calls closed at 18, so we remain right at the edge of requiring an adjustment. So now we condor traders sit back and enjoy the weekend of time decay...

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Written by Dr. Duke

Created: 16 September 2010

The markets opened downward this morning and chopped sideways and down for most of the day. Much of the loss was recovered late in the day. SPX closed unchanged at $1125, near its high for the day. RUT dropped $5 to close at $648. Trading volume was flat to down with the S&P 500 stocks trading flat at 3 billion shares. Trading on the NYSE dropped 2% and it dropped 13% on the NASDAQ. Initial unemployment claims reported at 450k, down three thousand from last week. Continuing claims were down 84k to 4.485 million. The PPI (producer price index) rose 0.4% in August, surprising analysts who expected a smaller increase.

Gold hit record highs today at $1,277 per ounce. To my mind, that demonstrates the high levels of fear and uncertainty still present among investors. A contrarian might see this as evidence that the bearish mood has run its course. But I think the equity markets will struggle to gain higher ground until we see significant improvement on the unemployment front.

My Sept RUT iron condor positions will all expire worthless this weekend; that closes Sept for a 15% gain. My Oct iron condor continues to torment me; the market is hovering right around the levels where I need to hedge this position and then remove the hedge. Today I sold the long Nov calls I bought yesterday. This position now stands at a P/L of -$685, delta = -$93 and theta = +$142. Theta is still larger than delta, but not by as much as I would like. The delta of the short Oct calls stands at 18, right at the edge of triggering the adjustment. So we continue to watch and see if the markets can break through resistance at this level or turn back downward. The way the bulls keep pushing the indexes back up each day is impressive. But if resistance continues to hold, sooner or later we will get some bad news that will push us back down to support levels.

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Written by Dr. Duke

Created: 15 September 2010

The area of $1125 to $1130 is a key resistance level for the S&P 500 and the SPX traded as high as $1126 today but then closed at $1125, up $4 on the day.  RUT has similar resistance levels, one broad one set in early August, at $655 to $665, and another resistance level at $670, set in late July. RUT traded down to $643 before running up to $654 and closing at $653, up $3 for the day. The early weakness in the markets was driven by several weak economic data reports. The Empire Manufacturing Survey reported out at 4.1, down from 7.1 last month. Industrial production gained 0.2% in August, down from the previous month's gain of 0.6%.Capacity Utilitization was flat at 74.7%. Trading volume was down with the S&P 500 stocks trading 3 billion shares. Trading on the NYSE was down 4% and volume was flat on NASDAQ.

The market jerked me around today. This morning the delta of my $690 calls in my Oct iron condor dropped to 16, so I sold my hedge options. Then a couple of hours later, I am back in the market buying more protection. The delta of the Oct $690 calls closed at 21. My position's P/L stands at -$615 with position delta = -$40 and theta = +$97. The theta/delta ratio is still strong, but RUT has been trading right around my adjustment trigger. But all you can do is follow your rules and trade what the market gives you.

By the way, I will be speaking at the Trader's Expo in Las Vegas on November 19. Consider coming out to this meeting; if you are there for my talk, catch me afterwards and I will buy you a drink.

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Written by Dr. Duke

Created: 14 September 2010

As mentioned in my blog yesterday, some analysts see $1125 as the top of the trading range for SPX. It certainly behaved that way today; SPX ran as high as $1127 before being pulled back by the bears to close essentially unchanged at $1121. RUT also pulled back a bit after running higher during the day. RUT closed at $649, down $3. Trading volume was essentially flat with 3.3 billion shares of the S&P 500 stocks traded; trading volume on the NYSE was flat and was up 6% on NASDAQ. A better than expected retail sales report encouraged traders before the open this morning. But profit taking started as soon as the market opened - too many up days recently and a lot of nervous traders remain concerned about the anemic economic recovery.

I am allowing my Sept RUT 530/540 put and 740/750 call iron condor to expire worthless and I think it is safe to log this one in as a $2,590 gain or a 15% gain on the capital at risk (20 contracts). The Oct RUT 540/550 put and 690/700 call iron condor stands at a P/L of -$40 with position delta = -$65 and theta = +$109. I have one Nov $690 call on as a hedge (my Oct $690 calls are at a delta of 18). For now, the Oct position is in good shape.

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Written by Dr. Duke

Created: 13 September 2010

The markets were buoyed today by the lack of surprises from the banking regulations revealed in Basel III; this boosted European banking stocks and also spread to our markets. Some positive economic data from China helped the markets as well. SPX closed at $1122 for a gain of $12 while RUT ran even harder to close up $16 at $652. An even more bullish sign was the increased trading volume across the board with the S&P 500 stocks trading up to 3.3 billion shares, just below the 50 dma at 3.5 billion shares. Trading on the NYSE increased 21% and increased 15% on NASDAQ. It is also noteworthy that both SPX and RUT blew through their 200 dma today - another bullish sign.

My Sept RUT iron condor is sitting at essentially full profit with both spreads far OTM; the deltas of the short options are less than one. I began to adjust my Oct RUT iron condor today and it now stands at a P/L of -$785 with position delta = -$74 and theta = +$121. If this bullish trend continues tomorrow, more adjustments will be required to keep this position out of trouble.

The analysts at iVolatility.com have identified a head and shoulders pattern on the SPX chart (left shoulder at $1150 back in January, the head at $1220 in late April, and the right shoulder at $1131 in late June). Since the neckline is at $1042 and the SPX failed to break through the right shoulder in July and only made it to $1125, they see SPX trading in the range of $1042 to $1125. By this analysis, if we see SPX break through $1125 (came close today), we may be headed higher; on the other hand, a break down through $1042 would signal a bearish trend - food for thought.