Dr. Duke's Blog

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Written by Dr. Duke

Created: 10 September 2010

The markets continued to inch higher today, but on lower volume. SPX closed above its $1100 resistance level at $1110, up $5 for the day. RUT traded up $2 to close at $636. Trading volume for the S&P 500 dropped to 2.6 billion shares. Trading on the NYSE declined 9% and declined 1% on NASDAQ. Trading volume in the S&P 500 stocks has steadily declined since the big up day last Wednesday. The only economic data released today was the wholesale inventories report for July, up 1.3%; economists had expected a more modest 0.4% increase.

My Sept iron condor has pretty well exhausted its time decay; both spreads are over four standard deviations OTM, so I have left the position open and plan to allow the spreads to expire worthless, barring a move on RUT that brings either spread to less than two standard deviations OTM. It should close for its maximum gain of $2,590 or 15% on 20 contracts.The Oct iron condor stands just above break-even at a P/L of +$120, delta = -$57 and theta = +$123.

Have a nice weekend.

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Written by Dr. Duke

Created: 09 September 2010

The unemployment claims numbers boosted the markets this morning, but sellers came in in the afternoon and took back most of the gains. RUT ran as high as $642 but retreated to close unchanged at $635. SPX fared better, blowing through resistance at $1100 and closing at $1104, up $5 for the day. Initial unemployment claims came in at 451k, down from last week's 478k; this was a better improvement than expected by analysts. However, the continuing unemployment claims came in flat at 4.48 million and analysts expected a modest decrease. But today was another low volume trading day with a 2% decrease on the NYSE and a 16% decrease on NASDAQ. The S&P 500 traded flat at 3 billion shares, well below the 50 dma.

My Sept RUT iron condor at 530/540 and 740/750 stands at a P/L of +$2,450 with delta = +$8 and theta = +$54. Both spreads are greater than three standard deviations OTM with one week to go. The Oct RUT iron condor spread at 540/550 and 690/700 stands at a P/L of -$300 with delta = -$42 and theta = +$129. The delta of the 690 call is back to 13, so the sideways action of the past few days has been helpful. The Sept iron condor has been a relatively calm trade; only one hedge adjustment was made during its life and that was established one day and taken off the next. I looked back at my trading record for this blog this afternoon. Assuming the Sept trade expires worthless or I close it tomorrow, my total gain is now over 24%. But I have taken 4 losses out of 16 months of trading. So the win ratio is about 75%, close to what the probability calculations would have predicted. Most significantly, only two trades out of 16 had no adjustments. This record reinforces what I teach my students: you cannot trade the iron condor profitably without a robust system of risk management. The trader who sees the advertisement of the high probabilities associated with the iron condor will be eaten alive if he doesn't know how to adjust this trade.

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Written by Dr. Duke

Created: 08 September 2010

Markets opened upward and chopped largely sideways most of the day, but closed with modest increases. RUT closed at $634 for a $5 gain, while the SPX broke  through the $1100 resistance level but could not hold it. SPX closed at $1099, up $7 on the day. Trading volume was mixed but positive. It increased 4% on the NYSE and 21% on NASDAQ. The S&P 500 stocks traded 2.9 billion shares, slightly higher than yesterday but well below the 50 dma. Volatility dropped 2% today with the VIX closing at 23%. Traders did not seem to have much of a reaction either way from the release of the FOMC's Beige Book this afternoon. The Beige Book did note improved consumer spending, a good sign for the recovery.

My Sept iron condor on RUT stands at a P/L of +$ 2,290 with a delta of +$4 and theta of +$115. Both spreads are well OTM and most likely will be allowed to expire worthless at expiration. I will make that call Friday. My Oct position stands at a P/L of -$160 with a delta of -$45 and theta = +$117. So theta/delta remains strong, although we are close to the adjustment point on the call side (the delta of the Oct $690 calls is 14). So we continue to simply play what the market gives us.

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Written by Dr. Duke

Created: 07 September 2010

Traders returned from the Labor Day holiday amid concerns for the health of the European Banks. This weighed heavily on financial stocks in our markets, and those selling pressures led to some profit taking in other sectors as well. The European financial concerns drove the Euro down and led to increased strength in the U.S. dollar, further weakening U.S. equities. I expected increased trading volume coming off the holiday weekend, but trading volume was weak virtually across the board. Trading was down 13% on the NYSE, but up 2% on NASDAQ. The S&P 500 stocks traded down significantly from last week to 2.7 billion shares, well below the 50 dma at 3.6 billion shares. RUT lost $14 to close at $629 and the SPX closed at $1092, giving up $13. Both indexes broke down through new support levels, which are the old resistance levels broken on the way up last week. The SPX broke down through its $1100 resistance level but remained above the 50 dma at $1082; RUT stopped just above its 50 dma at $627. I didn't find today's weakness too alarming due to the low volume and the fact that it wasn't based on some fresh economic news that the markets found to support the double dip fears.

My Sept iron condor is in excellent position with its P/L of +$2,350, delta = $1 and theta = +$82. The call spreads are over four standard deviations OTM while the put spreads are 3.4 standard deviations OTM. I made some adjustments to the Oct condor today that improved its position to a P/L of -$340, delta = -$29 and theta = +$117. For the directional trader in you, I suggest AAPL. I was impressed with AAPL today as the market indexes all pulled back significantly while AAPL lost less than a dollar per share. I have had the Jan 2011 270/300/330 call butterfly on AAPL for a couple of months and I think this remains a strong year-end play.

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Written by Dr. Duke

Created: 03 September 2010

The markets were pleasantly surprised by the nonfarm payroll data this morning. The loss of 54 thousand jobs was greeted positively because the street was expecting worse news; the unemployment rate rose slightly to 9.6% but that wasn't regarded as a significant change. The markets opened strongly on this news and ran up until mid-morning when the ISM Service Index reported out at 51.5 while 53.0 was expected. The markets pulled back sharply but then slowly recovered throughout the day to close near or at the highs for the day. The SPX blew through resistance at $1100, then pulled back, but then closed at $1105, up $14 for the day. RUT behaved similarly, closing at $643, up $11. All in all, it was a bullish day in the markets with the exception of weak trading volume. Trading volume of the S&P 500 stocks dropped to 3 billion shares while trading on the NYSE and the NASDAQ both declined 1%.

My condors stand approximately where they were yesterday; the Sept condor is up $2,290 with delta = +$2 and theta = +70. My Oct condor stands at a P/L of -$520, delta = -$99 and theta = +$65. When the market opened so strongly this morning, I hedged the Oct condor, but then I took the hedge off when RUT pulled back so strongly. Of course, by the end of the day, I should have had that hedge in place - the classic whipsaw.

All the signs for the past three days have been very bullish - the market appears to have significantly changed its mood. Even mediocre economic news is now being regarded positively - a big change from several weeks ago. What happens on Tuesday when everyone returns from the holiday weekend? Will the bulls remain in control?

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Written by Dr. Duke

Created: 02 September 2010

Most market watchers were surprised by the strong bullish day yesterday, but they may be even more surprised by today's strong follow through. The major indexes traded steadily higher all day and closed at or near their highs for the day. This is a bit surprising given the jobs report due out tomorrow morning. One might have expected some modest pullback at the close as traders considered the possibility of a poor unemployment report tomorrow morning. The report of initial unemployment claims came in at 472k this week, down six thousand from last week.  Continuing unemployment claims also dropped slightly to 4.456 million from last week's 4.479 million. Pending home sales rose 5.2% and factory orders for July rose 0.1%. It is hard to find economic news to account for the recent rallies; it just seems the mood on the street has changed. SPX blew through its 50 dma to close at $1090, up $10 while RUT rose $7 to close at $632. Trading volume dropped off significantly today with a 17% decline on the NYSE and a 22% decline on NASDAQ. 3.1 billion shares of the S&P 500 stocks traded, a 21% decline from yesterday's strong volume day.

My Sept iron condor on RUT at 530/540 and 740/750 now stands at a P/L of +$2,270 with a position delta of +$8 and position theta of +$54. Both spreads are greater than two standard deviations OTM. Closing the 20 contract position now would leave about $500, including commissions, on the table. My normal rule would be to evaluate this trade next Friday and, if both spreads were still OTM by over 2 SD, I would allow them to go into expiration. But I may be tempted to close this position after the holiday and take my profits because I still consider this a dangerous market. The Oct iron condor is a bit underwater at P/L = -$460, delta =-$71, and theta = +91. The 690 calls have a delta of 15, so we are close to triggering an adjustment. If tomorrow's market pulls back a bit, that will help this Oct position but be indifferent for the Sept position.

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Written by Dr. Duke

Created: 01 September 2010

The markets opened strongly up this morning in spite of a disappointing ADP jobs report of a loss of 10,000 jobs. The August ISM Manufacturing Index reported out at 10 am and surprised traders with a value of 56.3 for July, up from 55.5 for June. This fueled the market's rise for the balance of the day. Undoubtedly, the market's strong rise this morning was fueled by traders covering their short positions, but it was a surprisingly strong day for the markets. The major indexes closed at or near their highs for the day. SPX bumped up against the 50 dma at $1081 and closed at $1080, up $31. RUT ran up $23 to close at $625, near its 50 dma at $628. Trading volume was down a bit from yesterday, with a 7% decline on the NYSE and a 3% increase on NASDAQ. The S&P 500 stocks traded 3.9 billion shares, slightly down from yesterday but still above the 50 dma.

Both RUT and SPX convincingly broke out of the trading ranges of the past several days; if SPX can break through its 50 dma at $1081, the next resistance level will be $1100. RUT's next strong resistance level is in the area of $640 to $645.My Sept RUT condor is strongly positioned with a P/L of +$1,950 with position delta = +$16 and position theta = +$94. The "sweet spot" for this condor is around $640; both spreads are now greater than two standard deviations OTM with 15 days to go. The Oct condor is being stressed by this large upward move. It stands at a P/L of -$280 with position delta = -$56 and position theta = +$90. The delta of the $690 call is up to 14. The reduction in the theta/delta ratio shows the weakening of this position as RUT rallies. It will be telling if the traders open the day taking profits tomorrow, as has been typical of recent rallies. And, of course, the bogeyman of the unemployment report is lurking around the corner.

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Written by Dr. Duke

Created: 31 August 2010

Watching today's market reminded me of Shakespeare's quote. The markets opened down, then recovered and chopped sideways until weakening after the FOMC minutes were released. Then the markets recovered to close essentially unchanged for the day. SPX closed unchanged at $1049 after trading as low as $1041 and as high as $1055. RUT, in a similar pattern closed unchanged at $602. Even more surprising is that all of this thrashing back and forth occurred on a large surge in trading volume - just when we thought everyone had left for the weekend. The S&P 500 stocks traded 3.7 billion shares, right at its 50 dma. Trading volume on the NYSE was up 54% and up 30% on NASDAQ.

This morning's market reacted to the plunging Chicago PMI at 56.7, the lowest reading since last November but then was encouraged by the Consumer Confidence numbers increasing to 53.5 from last month's 51. More positive news came from the 4.2% increase in housing prices from the Case Schiller Housing Price Index. Just after the FOMC minutes were released, the market didn't appear to have much of a reaction. But then the markets sold off pretty hard but recovered before the close. Apparently, reading some of the FOMC committee's comments wasn't really news, but it reinforced a sobering view of the economy. RUT is almost exactly in the middle of the $588 - $617 trading range it has established recently. SPX tested support at $1040.

My Sept iron condor sits at a P/L of +$1,290, delta = +$44 and theta = +$106 and the Oct iron condor has a P/L of +$40 (essentially breakeven), with delta = -$22 with delta = +$91. Both trades are well positioned with strong theta/delta ratios. As long as we trade within the range of the past few weeks, these trades should remain strong. However, this market is still a very volatile, tricky market; it could fall off the edge at any moment. Watch your positions carefully.

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Written by Dr. Duke

Created: 30 August 2010

Friday's gains were slowly but surely taken back in a light volume trading day. Trading volume may continue to drop as we near the holiday weekend. Trading on the NYSE and the NASDAQ were both off 26% today. Trading in the S&P 500 stocks dropped dramatically to 2.6 billion shares from Friday's 3.7 billion shares. The broad indexes all closed at or near session lows; SPX dropped $16 to close at $1049, but still well above support at $1040. RUT also traded off to close at $602, down $15, but still above support at $588. I have pointed out support because I believe the market is caught in a trading range that will probably last through the holiday weekend; if SPX breaks $1040, then we are in trouble. Personal income was reported to have risen 0.2%  while personal spending rose 0.4% and the PCE price index rose 0.1%. So the economic data wasn't the problem. Perhaps the traders are in a "wait and see" mode until after Labor Day.

In the meantime, my Sept and Oct condors are well positioned. The Sept iron condor on RUT stands at a P/L of +$950, delta = +$53 and theta = +$112, while Oct stands at a P/L of +$240, delta = -$20 and theta = +$78. Trading ranges are good for condors! Time decay continues while we wait for the market to find its direction.

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Written by Dr. Duke

Created: 26 August 2010

The markets appeared encouraged initially this morning after seeing that the report of initial unemployment claims wasn't as high as expected (came in at 473k, down from last week's 504k). But that didn't last. The Federal Reserve bank at Kansas City reported stalled manufacturing activity in their district. Whether it was that news or just continued double dip fears, the markets traded off the rest of the day, closing near the day's lows. The SPX closed at $1047, down $8, while RUT traded down $5 to $600. Trading volume also declined 20% on the NYSE and dropped 10% on NASDAQ. Trading in the S&P 500 stocks declined to 3.3 billion shares. Both RUT and SPX appear to be building strong support levels, but it would be premature to take this as bullish. The double dip could still be lurking out there.

My Sept condor stands at a P/L of +$490, position delta = +$54 and position theta = +$102; the freshly minted Oct position stands at a P/L of -$460, delta = -$17 and theta = +$84. The theta/delta ratios of both positions are strong and both positions have ample safety margin at this point.