Dr. Duke's Blog

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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.

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Written by Dr. Duke

Created: 25 August 2010

Today began with a heavy dose of disappointing economic data: new home sales fell 12.4%, durable goods orders only increased 0.3% (analysts expected 3%), and Standard and Poors downgraded Ireland's debt. That sent the major indexes tumbling, but, surprisingly, the drop was short-lived. The markets recovered all of the drop and closed with reasonable gains. The SPX dropped as low as $1040 before rebounding to gain $3, closing at $1055. RUT dipped to $589 again today, reinforcing that support level. Then RUT recovered its losses and closed up $9 at $605. Trading volume decreased across the board with a 4% drop on the NYSE, and a 5% drop on NASDAQ. The S&P 500 stocks traded down to 3.7 billion shares, just below the 50 dma.

After watching RUT rebound off strong support at $589 for the second day, I decided to open my Oct RUT iron condors today at 480/490 and 690/700 for a credit of $2,900 (20 contracts). The Sept position at 530/540 and 740/750 stands at a P/L of +$690 with position delta = +$50 and position theta = +$91. Today's rise of RUT moved my theta/delta ratio back to a more healthy value.

Today's recovery was encouraging, but one has to temper that with the decreased trading volume.

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Written by Dr. Duke

Created: 24 August 2010

The markets opened weakly this morning but the existing home sales report at 10 am ET sent the markets plunging. But on the positive side, the markets recovered quickly, although the major indexes still closed the day in the red. RUT fell to $589 before recovering to close at $596, down $7 on the day. This matched RUT's low in early July, so it strengthened that support level and can be seen as offering some encouragement; but the flip side is that if RUT breaks through $589... look out below! SPX lost $15 to close at $1052. Both indexes sold off into the close. Trading volume was up across the board today with a 35% increase on the NYSE and a 28% increase on NASDAQ. Trading in the S&P 500 stocks jumped up to 3.8 billion shares today; that is slightly above the 50 day moving average at 3.7 billion shares. The 50 dma has been steadily dropping since mid-June.

My Sept condor stands at a P/L of +$290, delta = +$70 and theta = +$61. This theta/delta ratio of about one-to-one shows that we are nearing the adjustment edge of this position. But after RUT rebounded, the delta of the Sept $540 puts had recovered to 16. This morning's plunge in RUT scared me. I immediately bought two Oct $540 puts, but the sold them about 30 minutes later for a loss of $180 after RUT rebounded. It was the classic whip saw - but better safe than sorry.

The economic data appears to strongly support the premise of a faltering recovery at a minimum. The question now is: has the market's drop of the past three months been the forward looking market response or is there more downside to come? Today's sharp drop after the existing home sales report would argue there is more downside to come as the data worsens, but the rapid intraday recovery appears to refute that interpretation. In the meantime, be sure you are managing your risk and not "betting the farm" on your prediction.

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Written by Dr. Duke

Created: 23 August 2010

The markets ran up strongly first thing this morning but were quickly pulled back by the bears and traded along the neutral line most of the day. But the last hour was all selling with the indexes closing at or near their lows for the day. The SPX ran as high as $1081, but closed down $4 at $1067. RUT behaved similarly, running up to $618 before closing at $603, down $8. Trading volume was down across the board, with a 24% decline on the NYSE and a 13% decline on NASDAQ. The S&P 500 stocks traded under three billion shares, well under Friday's volume and below the 50 day moving average.

There was no economic news to drive the market either way today. Some M&A news appeared to boost the market this morning, but it wasn't sufficient to hold the intraday highs. It seems as though the market is afflicted with a general malaise or fear that leads to profit taking whenever stocks trade higher. The low trading volume suggests this sell off is the result of short term trading in and out, rather than a general institutional exit. But the danger of this market is that it won't take much bad news to set off a serious drop.

My Sept iron condor on RUT stands at a P/L of +$740 with a position delta of +$56 and position theta of +$72 on 20 contracts. I plan to initiate my Oct condors later this week.

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Written by Dr. Duke

Created: 20 August 2010

Trading opened down a bit this morning and drifted lower through the morning, but started to recover from noon onward. RUT traded down to $605 for most of the morning and then fell further to $602 before climbing steadily all afternoon to close at $611, unchanged for the day. The SPX traded in similar fashion, but didn't fully recover its losses, closing down $4 at $1072. Trading volume was subdued for an options expiration Friday; it was up 7% on the NYSE but down 9% on NASDAQ. The S&P 500 stocks traded 3.5 billion shares, down from yesterday and below its 50 dma.

RUT's settlement value has not yet been posted, but it seems likely to be around $605, so all of the spreads in my Aug RUT iron condor will expire worthless (550/560 and 590/600 put spreads and 680/690 and 705/715 call spreads). Thus the Aug iron condor gained $923 or 6% on the $15,400 of capital at risk. August was an extremely volatile month; I adjusted the position with long call or put hedges six times. In addition, I rolled spreads up and down four times. These adjustments consumed much of my potential profit. But remember: without those adjustments, we would have been forced to close this position early for either a breakeven or a loss. The adjustments kept us in the position so we could salvage a small profit. This brings my blog trading account up to an overall gain of 18% - not spectatcular, but pretty good given the market volatility we have been enduring. My Sept 530/540 and 740/750 condor stands at a P/L of +$860, delta = +$43 and theta = +$68.

I follow Mark Wolfinger's blog and I recommend it to you. He is a solid No Hype options trader, educator, and author. Today's blog brings up an excellent point about the potential pitfalls of multi-legged options orders - an excellent tip for condor traders. Check it out.

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Written by Dr. Duke

Created: 19 August 2010

The unemployment claims data brought the bears out on a selling spree today. Initial unemployment claims hit a new high of 500k from 488k last week, while continuing claims decreased by 13k to 4.478 million. Then the Philadelphia Fed survey came out at -7.7, down markedly from last month's 5.0. RUT dropped $17 to close at $611 while the SPX dropped $19 to close at $1076. SPX fell through its 50 dma at $1088 like a knife through butter. All of this carnage occurred on increased trading volume. The S&P 500 stocks traded 3.9 billion shares, just above the 50 dma at 3.7 billion shares. Trading on the NYSE increased by 15% and ran up 26% on NASDAQ.

I decided to allow all of the spreads in my AUG iron condor go into expiration; they will all certainly expire worthless with one possible exception for the 590/600 puts, but they have a safety margin of $11. If they expire worthless, this position ends with a $923 gain or 6% on capital at risk. The Sept position stands at a P/L of +$700 with delta = +$46 and theta = +$63. Normally, expiration Friday is a high volume day of trading; it will be interesting to see if volumes are up from today's high levels.

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Written by Dr. Duke

Created: 18 August 2010

The markets opened a bit lower this morning but recovered quickly and closed with modest gains on lower volume. Both the RUT and SPX charts were displaying the classic doji candlestick pattern, indicative of indecision among the traders, i.e., neither the bulls nor the bears were able to take charge and drive the market today. RUT closed up $2 at $628 while the SPX gained $2 to close at $1094. SPX tried unsuccessfully to break through $1100 once again today. If and when SPX closes above $1100, that will be a significant bullish signal. Trading volume was down across the board with a 5% drop on the NYSE and a 4% drop on NASDAQ. The S&P 500 stocks traded 3.2 billion shares, down a bit from yesterday and still well below the 50 dma.

My Aug iron condor on RUT stands at a P/L of +$753 with position delta = +$24 and theta = +$243. All of the spreads in this condor are now greater than two standard deviations OTM so I will probably allow them to expire worthless. But this depends on tomorrow's market movement. Even a small move down will cause me to close the 590/600 put spreads. The Sept position stands at a P/L of +$1,220, delta = +$24, and theta = +$72.

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Written by Dr. Duke

Created: 17 August 2010

The markets opened strong this morning and just kept on climbing through most of the day. The major indexes gave back some of their gains in the late afternoon, but still closed for significant gains. The SPX broke through the 50 dma at $1088 and even tried to break through the next resistance level at $1100 before being turned back and closing at $1093, for a gain of $13. RUT behaved similarly, trading as high as $630 before closing at $626 for a gain of $11. Home Depot posted better than expected earnings and Wal Mart posted in-line earnings; those results may have helped the overall market mood. Economic data was mixed to positive with a 1.7% increase in housing starts for July, but building permits dropped 3.1%. Industrial production increased 1.0% while the PPI increased 0.2%.

Trading volume increased with today's rally. The S&P 500 stocks traded 3.4 billion shares, up from yesterday but still below the 50 dma at 3.8 billion shares. Trading jumped 23% on the NYSE and increased 8% on the NASDAQ. Today's market action was rather bullish, with SPX breaking a significant resistance level on higher volume. If you are a directional trader, I would be cautious about going "all in", but perhaps we will avoid going over the cliff for a "double dip".

Today's gains strengthened my Aug condor position, resulting in a P/L of +$383 with delta = $43 and theta = +$438. The Sept condor sits at a P/L of +$1,260 with delta = +$26 and theta = +$61.

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Written by Dr. Duke

Created: 16 August 2010

Markets opened lower this morning but then traded sideways to slightly upward throughout the day. The SPX dropped as low as $1070 before bouncing back to close unchanged at $1079. RUT dropped to $605 at the open before recovering to close up $6 at $615. Trading volume was flat to down for the day. The S&P 500 stocks traded 2.6 billion shares, down from yesterday and well below the 50 dma. Trading on the NYSE was down 8% but unchanged on NASDAQ. The NY Fed Empire Manufacturing Index posted an increase to 7.1 from last month's 5.1, and the NAHB Housing Market index decreased to 13 for August from the previous month's value of 14. But tomorrow brings the Housing Starts and Building Permits reports, which will be more definitive data for the housing market.

I should not have my Aug condor on RUT still open, but I have been squeezed into this corner, attempting to salvage a gain or at least minimize the loss. The position with 550/560 and 590/600 put spreads and 680/690 and 705/715 call spreads (10 contracts of each) now stands at a P/L of -$727 with a position delta of +$110 and theta = +$397. The theta/delta ratio is good but the large value of delta emphasizes the price risk for this position, with RUT so close to the 590/600 put spreads. My Sept 530/540 and 740/750 iron condor on RUT stands at a P/L of +$660, delta = +$42 and theta = +$62 (20 contracts). So the question remains: have we found the bottom? Today's price action on the SPX seems to suggest that, but the low trading volume doesn't give one any confidence.

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Written by Dr. Duke

Created: 13 August 2010

The University of Michigan Consumer Confidence Survey reported out at 69.6, a small improvement from last month's 67.8. That report served to keep the markets trading near the unchanged line for most of the day. But after about 2 pm ET, the markets slowly declined into the close, but trading volume was greatly reduced. Trading was down 15% on the NYSE and over 27% on NASDAQ. Trading volume in the S&P 500 stocks dropped to 2.7 billion shares, well below the 50 dma. This was the lowest trading volume for the S&P 500 for this year. The SPX traded within $2 of its 50 dma at $1088 before pulling back to close down $4 at $1079. $1088 on SPX will be a key resistance level to watch for a measure of the market. RUT pulled back a bit more to close at $609, a loss of $7 on the day.

My Aug RUT condor closed the day with a P/L of -$1917 with delta = +$133 and theta = +$204. All of these spreads are greater than two standard deviations OTM except the 10 contracts of the 590/600 put spreads. I will be looking for an opportunity to close them on Monday. The Sept condor is in the black with a P/L of +$440, delta = +$50 and theta = +$47.

Have a great weekend.