Dr. Duke's Blog

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Written by Dr. Duke

Created: 11 August 2010

It appears that many traders began to take the Fed's assessment of the economy much more pessimistically after thinking about it overnight. The market sold off at the open and traded even lower as the day progressed. China's reports of weaker industrial production in July probably didn't help the situation. Talk of a double dip has once again taken the front row in traders' worries. RUT traded down $26 to close at $620 while the SPX closed down $32 at $1089, the 50 day moving average (dma). This move occurred on higher volume, with the S&P 500 stocks trading 4 billion shares, right at the 50 dma. Trading volume on the NYSE was up 15% and trading on the NASDAQ increased 11%.

In volatile markets like we have been experiencing, one's condor position can change overnight; yesterday, the Aug position appeared to be well positioned; today I bought one Aug $630 put for $17.45 to hedge this downside move; this brings the position to a P/L of -$1712, delta = +$31 and theta = +112. My Sept condor stands at P/L = +$980 with delta = +$58 and theta = +$19. The Aug position has now required six hedge adjustments plus four rolls of spreads up and down - what a volatile market! More importantly, we are still "in the game" with a shot at breaking even or perhaps even a small profit. Which way will the roller coaster run tomorrow?

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Written by Dr. Duke

Created: 10 August 2010

The drop of 0.9% in nonfarm productivity levels surprised the market this morning and caused a sell-off on higher volume. RUT dropped back to its 200 dma before bouncing to close at $646, down $13 on the day. SPX fell through its 200 dma but recovered to close at $1121, down $7 on the day. The FOMC announcement appeared to buoy the market a bit, but it was short lived. As expected, interest rates were unchanged but some of the Fed's language concerning the economy was sobering, confirming signs of very slow economic recovery and not giving a lot of hope for anything to change soon. As has been typical lately, the trading volume bounced up on the sell-off, increasing to 3.5 billion shares of the S&P 500 stocks, up 29% on the NYSE, and up 26% on NASDAQ.

My Aug iron condor on RUT was helped by this sell-off, now standing at a delta of -$27 and theta = +$265, while the Sept condor has a delta of +$14 and theta = +$55. RUT appears to be building strong support at its 200 dma at $642 while the SPX appears to have strong support in the range of $1100 to $1115. This pattern together with the weak volume on advances, suggests the risk to our condors is to the upside, not the downside. But, the key is to play what the market gives us, not what we predict. For now, both of my condors are well positioned.

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Written by Dr. Duke

Created: 09 August 2010

Markets traded up today, but again, the underlying volume wasn't strong. Advances on weak volume have become the standard for this market. RUT increased $9 to close at $660 while the SPX ran up $6 and closed at $1128. Trading volume declined 20% on the NYSE and declined 17% on NASDAQ. The S&P 500 stocks traded 2.8 billion shares, well below the 50 dma of 4 billion shares. One possible explanation for today's lower volume may have been rooted in traders looking forward to the FOMC announcement tomorrow. But in general, I think the recent low volume patterns of trading reflect traders' lack of conviction concerning the economic recovery.

The call spreads of my Aug iron condor remain uncomfortably close to the index. The short $680 calls have a delta of 23; time is helping since we now only have ten days to expiration. The delta of this position is now -$108, which underscores the price risk of further increases in RUT. Theta is now at +$255, so the theta/delta ratio is still strong. My Sept RUT iron condor at 530/540 and 740/750 is well balanced with a delta of -$13 and theta = +$62.

So now we look forward to the FOMC announcement tomorrow, although it doesn't appear that we can expect any news of much significance. Traders will be examining the statement closely for clues about future economic prospects, but I don't expect much of an effect on the market.

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Written by Dr. Duke

Created: 06 August 2010

The jobs reports brought the sellers into the market this morning, driving the major indexes significantly lower; however, most of those losses were recovered during the last hour of trading. RUT traded down to its 50 dma at $640 before bouncing up to close at $651, a loss of $4 on the day. SPX broke through its 200 dma at 1115 and then recovered to close at $1122, for a loss of $4.

Over 131k jobs were lost in July and the unemployment rate remained unchanged at 9.5%. Although this job loss number was smaller than last month, it was still a loss. The average work week remained essentially unchanged at 34.2 hours (it was 34.1 hours last month). Normally, one expects to see work week hours increase before hiring resumes.

Trading volume was modestly higher with a 9% increase on the NYSE and a 5% increase on NASDAQ. The S&P 500 stocks traded at 3.2 billion shares, up modestly from yesterday but still under the 50 dma. So our sideways to upward trend on modest volume continues. Economic data has been proving very uninspiring and this doesn't give the bulls the momentum they need to sustain a rally. But the data are not bad enough to fuel a case for the bears so dips in the market are seen as bargains - today's action was an excellent example. So, this sideways action is likely to continue until the economic data can build either a bullish or a bearish case.

I removed the call hedge this morning on my Aug condor, which now stands at a P/L of -$1,682 with position delta = -$61 and position theta = +$220. Now that we are under two weeks to expiration, theta is ramping up on this position. The Sept iron condor on RUT stands at a P/L of +$740, with delta = +$1 and theta = +$74.

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Written by Dr. Duke

Created: 05 August 2010

Traders were disappointed with the unemployment claims data this morning and traded sideways to downward all day. Initial unemployment claims rose by 19k to 479k while the number of continuing claims dropped by 34k to 4.537 million. These were modest changes but traders were looking for some stronger signs of recovery. Now all eyes focus on tomorrow morning's jobs report with the widely followed unemployment rate (officially the Nonfarms Payroll Report).

RUT closed down $8 at $655 while the SPX closed nearly unchanged at $1126, down $1. But trading volume fell once again across the board with a 10% drop on the NYSE and a 12% drop on NASDAQ. Trading in the S&P 5000 stocks declined to 2.8 billion shares; this has declined steadily from about 5.5 billion shares per day at the end of July. This sideways action on lower volume feels like a spring coiled and ready to break out one way or the other. That is why I chose to add an ATM call to my Aug condor yesterday; I lost money on it today but I am still worried about a surprise in the jobs report sending this market higher and a portion of my call spreads are too close at 680/690. Another reason I am concerned about protecting the up side is the price action on SPX. For three days now we have been building support at $1120; today SPX traded down to just below $1120 and then bounced to close virtually unchanged. That pattern suggests the likelihood of a breakout upward.

The Greeks on my Aug condor look good at a delta value of -$38 and theta = +$179, a very strong ratio. But at this point, this condor is looking more and more like a breakeven trade. By contrast, initiating the Sept condor just in time for this sideways trading pattern has that position off to the races with a P/L of +$1,000, delta = -$14 and theta = +$59.

I have been invited to speak at the Traders Expo in Las Vegas Nov 17-20. If you are planning to be there, let me know so we can get together. The detailed agenda isn't available as yet, but you can register free of charge and receive updates. And rooms in Las Vegas are much less expensive these days! You can stay at the Bellagio for as little as $104 per night!

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Written by Dr. Duke

Created: 04 August 2010

The markets were very choppy today but gradually traded upward, but on flat volume. RUT ran up $7 to close at $663 while the SPX also increased $7 to close at $1127. Trading volume was up 3% on the NYSE and up 1% on NASDAQ. Trading in the S&P 500 stocks came in at 3.3 billion shares, flat from yesterday and below the 50 dma at 4 billion shares. The S&P 500 trading volume 50 dma has dropped from 5 to 4 billion over the past month, reflecting the steady reduction in trading volume.

This is significant because bull markets have traditionally made new highs on increased trading volume. The market highs made over the past month have occurred with steadily decreasing volume. So what does this mean? My crystal ball is a little cloudy, but I think the best interpretation is to look at this market as though it has been trading sideways since the beginning of July rather than increasing. If it had been trading sideways for the past month, we would be expecting it to break out one way or the other, but be unsure of the direction. I think that is precisely where we are; the price increases of the past month are deceptive if you see them as bullish. Tomorrow's unemployment claim data and Friday's unemployment rate report could tip the market either way.

ADP's employment report was a bit of good news with 42k new jobs in July. The ISM Services Index reported out at 54.3, higher than expected by the market and modestly higher than last month. ADP's report has heightened expectations for the unemployment numbers tomorrow and Friday.

My Aug iron condor is being squeezed tighter by these increases in RUT. Today, I closed my 510/520 puts and rolled them up to 590/600. I also bought one Aug $660 call to protect my 680/690 spreads. Both of these moves helped moderate the Greeks: delta = -$66 and theta = +$133. The Sept condor is proceeding well with delta = -$25 and theta = +$60. The next two days should be interesting to see if a trend with volume can develop in either direction or if we will continue to muddle along.

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Written by Dr. Duke

Created: 03 August 2010

The markets opened down this morning and chopped sideways throughout the day on lower volume. RUT closed down $6 at $656 while the SPX lost $5 to close at $1120. Trading volume was flat to lower with 3.3 billion shares of the S&P 500 stocks traded, well below the 50 dma. Trading on the NYSE was down 2% while it was up 3% on NASDAQ.

Personal income and expenditure numbers came in flat for June while factory orders dropped 1.2%. Pending home sales dropped 2.6% in June. None of these reports were terrible, but it didn't paint a picture of a strong recovery either. Either this mediocre economic data discouraged traders or they were simply taking some profits after the recent gains. Either way, it made for a low volume, mostly down trading day.

My Aug condor remains at a tipping point with the delta of my short $680 calls at 26. Position delta = -$114 and theta = +$172, so time is starting to work for us in this position, but a strong move upward will close the trade. Even if RUT continues to wander sideways, the maximum profitability of this position is only about $500. Our multiple adjustments this month have kept us out of trouble, but have also worn down our maximum gains. The Sept condor has moved into the black with delta = -$18 and theta = +76.

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Written by Dr. Duke

Created: 30 July 2010

Disappointing GDP data drove the market down at the open, but reassuring Chicago PMI and consumer sentiment data appeared to bolster attitudes and all of the major market indexes ended the day unchanged. Second quarter GDP came in at positive growth of 2.4%, but that was down form the 3.7% of the first quarter - this reinforced the double dip viewpoint camp. But then the Chicago PMI came in at 62.3, up from 59.1 and the University of Michigan's consumer sentiment for July came in higher at 67.8 (from 66.5 last month). Both of these numbers were pleasant surprises to analysts. RUT closed unchanged at $651 and SPX closed unchanged at $1102. It is worth noting that RUT again touched its 200 dma at $640 before rebounding today. That price action is building a case for support at that level. All of this back and forth to an unchanged close occurred on lower trading volume. The S&P 500 stocks traded 3.7 billion shares, down from yesterday and well below the 50 dma. Trading on the NYSE was down 4% and was down 9% on NASDAQ.

My Aug iron condor on RUT at 510/520 and 550/560 and 680/690 and 705/715 stands at a position delta of-$87 and theta = +$134, not ideal, but still in the game. My multiple adjustments on this position have almost exhausted my profit potential. The Sept condor on RUT at 530/540 and 740/750 is still young with delta = -$12 and theta = +72.

Today's trading conference in Chicago was excellent; you can download the slides for my presentation in the Downloads section under Webinars. Have a great weekend and remember: if you are thinking about your trades this weekend, you probably aren't managing the risk appropriately!

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Written by Dr. Duke

Created: 29 July 2010

Today's markets gave traders quite a ride. RUT opened up and ran to $658 before dropping to bounce off the 200 dma at $641 and then ran up to close unchanged at $650. SPX displayed a similar pattern but did not recover all of its losses in the afternoon, closing at $1102, down $5. Trading volume jumped up today across the board with an increase of 18% on the NYSE and 26% on NASDAQ. The S&P 500 stocks traded up to 4.2 billion, just below the 50 dma.

Initial unemployment claims dropped by 11k to 457k and continuing claims increased by 81k to 4.56 billion. Unemployment appears to be stubbornly holding pretty flat; it is hard to discern an upward trend from the data. Earnings reports by and large have been good, but the companies' outlooks have averaged luke warm at best. The bulls are struggling to find sufficient evidence to "buy at the lows" while the bears can't seem to get too enthused about selling off strongly. Until that mixed outlook of indecision changes, we aren't likely to see a strong trend in the market in either direction. But the increased volatility in the markets during this period of indecision is somewhat new - the fear quotient is still quite high, and this causes the rapid swings back and forth we saw today.

At the open today, I was happy I still had one of my Sept call hedges in place, but later I decided to sell that, thinking it wasn't necessary any longer. Then, of course, the market turned back upward and ended up right where it started. My Aug condor's 680/690 call spreads are too close to the fire with a delta of 24. The condor position delta stands at -$69 while theta = +$131; this theta/delta ratio confirms what we know: I have significant price risk to the downside and while my profit engine (theta) is still larger, it is not much larger. It is at times like this that I am amazed by the analysts on CNBC who sound so confident in their predictions. How do they do that?

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Written by Dr. Duke

Created: 28 July 2010

The SPX opened up this morning just below the 200 dma and traded lower as the day progressed; SPX closed at $1106, down $8. The 1% drop in durable goods orders for June was disappointing to the market and the Fed's Beige Book didn't help with a sobering assessment of business conditions across the country. Economic data continue to point to a very slow recovery at best and a double dip at worst. RUT dropped $11 to $651. Trading volume dropped off today, with a 10% drop on both the NYSE and the NASDAQ. Trading in the S&P 500 stocks dropped to about 3.3 billion shares, well below the 50 dma. That lower trading volume was good news in that it suggests the large institutional players were not selling in large numbers during today's decline. This market appears to be depressed, but not yet in panic mode.

Today's decline in RUT helped my Aug condor position. The delta of the short Aug $680 calls pulled back to 26 and I sold one of my Sept hedges. Position delta reduced to -$53 with position theta = +$125. So the theta/delta ratio is in a good position. I also opened my Sept RUT iron condor today after the risk of an extreme market move with the Fed Beige Book release this afternoon was past.