Dr. Duke's Blog

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Written by Dr. Duke

Created: 16 April 2010

When Thomas Paine said, "These are the times that try men's souls", he wasn't thinking about markets, but that is certainly an appropriate quote for delta neutral traders over the past 18 months. Only two days ago, the markets took off with a roar and ran over everything in their way. Today they gave back much of those gains. Google's earnings announcement unnerved some investors with concern over future investments and Eric Schmidt's absence on the conference call. Based on that alone, I expected some softness this morning. But then the SEC charged Goldman Sachs with fraud and the market collapsed; everyone was running to lock in the profits from this incredible run-up of the past 45 days. RUT dropped nearly $10 to close at $715 while the SPX closed at $1192, down nearly $20. Trading volume is always higher than average on expiration Friday but today's trading was off the charts. The S&P 500 traded over seven billion shares today!

Ironically, I adjusted my May condor on RUT yesterday by rolling half of my 750/760 calls to 770/780 and closing all of my 590/600 puts and rolling them to 650/660. I left my June $750 calls in place as a hedge against a continued move upward. Imagine my surprise today. But it is better to have adjusted early than too late. The position greeks are solid with delta = +$13 and theta = +$82. The risk/reward chart suggests the P/L for this position will be essentially unchanged up to around $730 on RUT, so it is well hedged for a continued move upward. But do I need a hedge for the upside? The RUT hit a low of $710 today and then traders came to the table and bid it back up, so I think the basic bullish case for the market is intact. Bulls are still buying the pullbacks.

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Written by Dr. Duke

Created: 15 April 2010

The markets slowed to catch their breath after yesterday's huge run; trading was choppy but mostly sideways. Trading volume was flat to increased with volume on the NYSE up 3% but down 9% on NASDAQ. But the S&P 500 traded at over 5 billion shares, even more than yesterday's big increase. Greece's financial difficulties are still on traders' minds; today's economic news was mixed with the Empire State Manufacturing survey hitting a five month high but industrial production only increased 0.1%, less than expected. Initial unemployment claims increased to 484k from 460k and continuing claims increased by 30k to 4.6 million. It seems as though most economic measures are flattening or improving, but jobs aren't being created yet. A combination of some disappointing economic news together with consolidation from yesterday's upward run led to a mostly sideways day in the markets. RUT closed up $2 at $724 and the SPX closed nearly unchanged at $1212. The bullish case is still very much alive; all dips are being bought.

I made further adjustments and repositioned my May RUT iron condor to shift its greeks into better position: now delta stands at -$1 and theta = +$81.  The underlying strength of this market is remarkable; it is just bulldozing right through all of the overbought technical indicators. So I decided to aggressively reposition my May condor to a delta neutral stance with 35 days to go.

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Written by Dr. Duke

Created: 14 April 2010

Intel's earnings announcement set the bulls on a rampage today, closing all major indexes at new 52 week highs. RUT ran over $14 to close at $721. SPX closed at a new high of $1,211 with an increase of over $13. The Fed's Beige Book kept the rally going this afternoon with its observations of increased economic activity across a broad spectrum of the economy. Intel's move led an increase in trading volume on NASDAQ of 20%; NYSE increased 8% while the S&P 500 trading volume surged to nearly five billion shares, well above its 50 day moving average at under four billion shares.

Today's increase in the Russell 2000 Index (RUT) represented a 1.5 standard deviation move - a huge move for one day. My weak April condor position was destroyed by this move. I closed the double calendar for a $910 loss and then closed the 720/730 call spreads; ironically, I could have closed those calls yesterday for a small debit on the order of $0.10 - $0.20. Assuming that the 630/640 put spreads expire worthless, the April iron condor closes with a $3,745 loss. Ouch! Now you see why options coaches and teachers don't trade in public.

Our May RUT iron condor required an initial adjustment today, but will require major adjustments soon if this upward momentum continues.

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Written by Dr. Duke

Created: 13 April 2010

Alcoa's earnings report disappointed many traders last night and reinforced the fears of some that the economic recovery is fragile at best. But by mid-morning, the market started recovering its losses and closed the day with modest gains. RUT closed up $2 at $707 while the SPX gained $1 to close at $1197. Trading volume was up significantly across the board with an 11% increase on the NYSE, a 24% increase on NASDAQ and trading on the S&P 500 rose back up to hit its 50 day moving average. Today's market action demonstrates the underlying bullish strength of this market when the bears take the market down and the bulls can bring it all the way back in the same session. Today's market rise was partially in anticipation of an expected positive earnings report from Intel after the close (earnings were up significantly and INTC is up about $1 in after market trading). JP Morgan Chase reports tomorrow morning before the open and the CPI reports will be out in the morning; the Fed's beige book comes out tomorrow afternoon. All of these news events are potentially market moving, but it is hard to predict the direction.

My April RUT iron condor is limping into the final lap with a P/L of -$849, delta = -$237 and theta = +$727. With such a large position theta, each day makes a large difference in this position's P/L. The double calendar I added to this position isn't helping much at this point, with RUT's IV down a couple of points and RUT at the upper breakeven for the double calendar. The May condor stands at a P/L of +$600, delta = -$77 and theta = +$85.

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Written by Dr. Duke

Created: 12 April 2010

Slow trading with modest gains characterized today's session; trading volume remained flat to lower. Traders remain wary of global debit issues, persistent high unemployment, and many overbought technical indicators - but the market just keeps grinding out more advances. Earnings reports begin this week and traders will be watching them closely for clues. But it is difficult to predict the market's response; good reports may encourage more buying or it could trigger a round of profit taking. However, weak business results and pessimistic forecasts could begin a pullback. The market has been nearly balanced now for several weeks; it is hard to predict what news may trigger a move. The CPI report Wednesday will be scrutinized for signs of inflation; but that would be a surprise at this point. I just took a quick look at Alcoa's earnings report - doesn't look like good news to me. But maybe the market will be happy with "slightly better".

My April iron condor stands at a P/L of -$979, delta = -$240 and theta = +$600 and May stands at a P/L of +$400, delta = -$81 and theta = +$90. I will be closing the embedded double calendar in the April position Wednesday or Thursday.

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Written by Dr. Duke

Created: 09 April 2010

Choppy, sideways trade characterized most of today's trading until the last half hour when the bulls pushed the market to new 52 week highs. RUT closed at $703, up $3, while the SPX closed up almost $8 at $1194. However, trading volume was down across the board; trading on the NYSE was down 8% and trading was down 9% on NASDAQ. Trading on the S&P 500 dropped below yesterday's volume which was below the 50 day moving average. So we have another day of higher highs on lower volume. All the books and experts tell us that's a bearish sign... but it keeps moving up. Another example of why it is wise to trade what you see rather than what you expect.

My April condor stands at a P/L of -$1355 with a delta of -$230 and a theta of +$445. while the May condor stands at +$220, delta = -$74 and theta = +$92.

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Written by Dr. Duke

Created: 08 April 2010

The initial jobless claims data this morning was a little discouraging with another increase to 460k from last week's 442k, but the continuing claims total decreased from 4.681 to 4.550 million. The markets opened up weakly but then slowly climbed throughout the day to end nearly unchanged or with small gains. RUT closed unchanged at $700 after trading as low as $692. SPX gained $4 to close at $1186 after trading as low as $1175. This is actually a very bullish sign; it shows that whenever the prices drop very much at all, there are plenty of buyers that view those prices as bargains. So while there isn't sufficient incentive to buy strongly and drive the market higher, there isn't a strong bearish case either. Trading volume dropped across the board today with a 10% drop on the NYSE, and an 18% drop on NASDAQ. Trading on the S&P 500 stocks dropped back below its 50 day moving average. Minimal economic news is expected tomorrow but earnings announcements from the blue chips start next week with Alcoa on Monday and Intel on Tuesday. Those reports may push this market one way or the other.

My Apr condor is winding down and now stands at a P/L of -$625, delta = -$155 and theta = +$296. May's position stands at P/L of +$660, delta = -$58 and theta = +$74.

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Written by Dr. Duke

Created: 07 April 2010

The markets traded largely sideways this morning with many traders waiting on the treasury auction for clues; when strong demand for the treasury bonds resulted, stocks rallied briefly, but then began to falter. Some of the losses were erased in the last thirty minutes of trading. RUT matched yesterday's high of $703 but could not hold it, closing at $699, a loss of $2. SPX reached within $2 of yesterday's high before closing down $7 at $1182. Many of the talking heads attributed today's weakness to the financial difficulties in Greece, but I doubt that explanation. I think there is simply insufficient good news to propel this market higher; however, we have not had any bad news either. Hence we are caught in a narrow trading range. Trading volume was up 21% on NYSE and flat on NASDAQ; but it rebounded to above the 50 day moving average on the S&P 500. So we have increased volume on a down day - a bearish signal.

Today's candlestick on RUT was a classic Harami - a weak trend reversal signal. This particular harami is known as a Harami Cross, where the body of the candlestick is very small - essentially a doji. The psychology behind this pattern makes sense: a strong up day followed by a day of indecision - RUT traded up to yesterday's high and then down to a low and rebounded to close near the middle of its intraday range. At a minimum, we have a consolidating sideways trend, waiting for some news to drive the market one way or the other. If you want to learn more about candlesticks, read Japanese Candlestick Charting Techniques by Steve Nison; it is an excellent book.

Volatility rose a bit today and that, together with the price action, helped my embedded double calendar back to breakeven. In total, the April position now stands at -$841 with delta = -$129 and theta = +$288. May's iron condor is showing a gain of $520, with delta = -$58 and theta = +$81.

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Written by Dr. Duke

Created: 06 April 2010

The S&P futures were lower this morning, but the markets quickly shrugged off that early weakness and rose to set new 52 week highs today; but trading was mostly sideways and gradually upward. The markets were waiting on the FOMC minutes to be released, but then traded weakly upward on that news. Trading volume was muted: up 7% on the NYSE, flat on NASDAQ, and still below the 50 day moving average on the S&P 500. The VIX dropped to 16.2%, approximately as low as it was in late March, but you have to go back to May of 2008 to see similar lows. RUT closed up less than $4 at $701 while the SPX closed at $1189, up $2; these are both 52 week highs. It appears that the bulls don't have sufficient conviction to chase the market higher, but no one is jumping out either. Every technical analyst is screaming overbought, but it doesn't phase the traders; they may not be buying in volume, but they are buying.

My condors are getting pushed into a corner by this slow relentless push upward. April now stands at a P/L of -$1,955 with a position delta of -$210 and theta = +$321. The double calendar I have embedded in this condor is right at its upper breakeven and now stands about $350 underwater. The May condor has surrendered some of its gains and stands at +$280, with a position delta of -$72 and theta = +$82. The fact that theta and delta are similar in absolute value shows the stress on this position. So we wait and see if the bulls can put another positive gain on the books tomorrow.

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Written by Dr. Duke

Created: 05 April 2010

Good economic news Friday and today encouraged the bulls to drive the markets higher today, setting 52 week highs on both RUT and SPX. Friday's jobs report showed a gain of 162k jobs in March, with only 48k of those due to hiring for the census. This was the largest growth in private jobs since May, 2007. The unemployment rate remains at 9.7%. But the ISM Service index reported out at 55.4 this morning, its highest level since 2006. As the market opened this morning, the remaining question was whether much of this good news was already priced into the market. But the markets just moved up stronger toward the end of the trading day; this is a very bullish pattern since one might expect a little profit taking toward the end of the session after such a strong run. On the other hand, all of this strong upward price run was accomplished in lower trading volume; trading on the NYSE was down 3%, down 10% on NASDAQ and  trading volume for the S&P 500 fell even farther below its 50 day moving average than it was on Thursday. So, we have a higher high on lower volume - not reassuring. RUT closed up almost $14 at $698 and SPX closed at $1187, a gain of over $9.

My April iron condor on RUT stands at a P/L of -$1,515, delta = -$149 and theta = +$288. May stands at +$420, delta = -$68 and theta = +$82. If this bull run continues, I will have to make some adjustments this week.