Dr. Duke's Blog

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Written by Dr. Duke

Created: 30 October 2009

Yesterday's up day was apparently just a head-fake. The Chicago PMI and the consumer sentiment reports both beat expectations, but that wasn't enough for this market - the sellers went on a rampage. It reminds me of a few weeks ago when the bad news was ignored and the market continued to rally. RUT dropped over $17 to close at $563 while the SPX dropped almost $30 to close at $1036. The next area of support for RUT is around $548-$552 while support for SPX is around $1020.

I re-established my Jan $510 put hedge this morning (two contracts at $12.70). This left my Dec iron condor at the close with a P/L of -$20, delta = -$18 and theta = +$20. The adjustment puts gained over $500 today, minimizing the loss on my condor and also flattening the risk/reward curve down to about $520. This gives the market time to turn around or for us to further adjust or close our position without getting ourselves into a large loss.

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Written by Dr. Duke

Created: 29 October 2009

This market's huge up day after such a sell-off yesterday has me thinking of poor exasperated Charlie Brown. The consensus explanation is that the market was surprised by the better than expected 3.5% GDP growth for the third quarter, but I don't think anyone really understands this market. What this volatility really shows is the general level of anxiety among traders; it takes very little to start either a bullish run upward or a panic for the exits. The lesson for us mice to avoid being squashed by the elephant stampede is old fashioned risk management: have a plan; follow your plan; and always have stop loss orders in place.

RUT ran up almost $14 to close at $580 while the SPX ran almost $23 to close at $1066. The SPX move was particularly strong and broad based across industry groups, which is why I decided to remove my hedge position on the Dec condors. But I certainly don't believe we are out of the woods yet. This is a scary market (and Halloween is coming!).

I sold the two Jan $510 puts I purchased yesterday to hedge my Dec iron condor for $11.50 (loss of $260) when the deltas of my short Dec $510 puts returned to 16. This left the P/L at +$200, delta = +$7 and theta = +$63. Make sure your stops are in place and be especially disciplined in this market.

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Written by Dr. Duke

Created: 28 October 2009

Today's market certainly answered our questions about consolidation versus correction. The S&P 500 broke through its 50 day moving average, closing at $1043, down over $20 on the day. RUT broke support at $576 and closed at $566, down almost $21 on the day. RUT's break through $576 confirmed the double top pattern we commented on yesterday. Investor's Business Daily (IBD) declared a "market in correction" yesterday and today's action made it abundantly clear to everyone. By the way, I highly recommend IBD's "The Big Picture"; they do an excellent job of tracking the overall market trend.

As the market opened up this morning in negative territory, I closed my Nov 520/530 put spreads for $0.90 (20 contracts). This leaves my Nov iron condor with 20 contracts of the 680/690 calls that are almost three standard deviations OTM. I will monitor them, but most likely will allow them to expire worthless. If that is the case, my Nov iron condor will have gained $2,060 or 13% on capital at risk.

Later in the morning, as the market carnage continued, I bought two contracts of the Jan $510 puts for $12.80 to hedge my Dec 500/510 put spreads. This is somewhat ironic since I just established that condor yesterday. This left my Dec condor at the close with a P/L of zero, delta = -$29 and theta = +$29. These weak Greeks illustrate how vulnerable the iron condor is to early moves against the position.

Allow me to make one other observation about today's activities in the market: as I was looking at my Nov condors this morning when the market opened down, I had a tempting voice in my head trying to convince me to wait and give it some time to turn around - "don't close those put spreads at a loss; maybe we can get out even later today or tomorrow". Later in the day, I was tempted not to buy the hedge for my Dec condor because I had just put that position on yesterday. But my short puts had already crossed delta = 17, so I bought the Jan puts. Develop your system and then follow your rules. It sounds simple, but anything involving our emotions is rarely straightforward.

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Written by Dr. Duke

Created: 27 October 2009

The markets traded erratically all day but decidedly more negative as the day worn on. The RUT closed down over $7 at $587, right at the support level set in late August; the next support level is at $576, set on Oct. 2. The RUT chart is a classic double top pattern that will signal a reversal of the up trend if RUT breaks $576 with strong volume. SPX closed down about $4 to $1063. The one piece of calming data is that the past several days of losses in the markets have occurred at average to below average trading volumes.

My Nov iron condor on RUT stands at a P/L of +$2,060, delta = +$49 and theta = +$80. The position theta/delta ratio has dipped below 2:1, and the delta of my short $530 put has risen to 12. My put spreads are at breakeven or slightly underwater (although I already banked $500 from rolling the original put spreads upward). I will be closing these put spreads if the RUT deteriorates any further.

I established  my Dec RUT iron condors today with 20 contracts of the $500/$510 puts at a credit of $0.95 and 20 contracts of the $660/$670 calls at a credit of $0.95, for a total position credit of $3,800 on $16,200 at risk. I positioned this condor slightly bearish at a delta of -$15 and theta = +$81. So now we watch to see if the negative trend of the past few sessions levels out or accelerates into a full blown correction.

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Written by Dr. Duke

Created: 26 October 2009

The volatility of this market can be a bit unnerving. It looked like we were in for a moderate sideways to up day this morning, which was reassuring after Friday's strong push downward. But just after 11 am ET, the bottom fell out and the rest of the day was in negative territory. The Russell 2000 Index (RUT) closed down over $7 at $594, just above support at $588-$590. The S&P 500 (SPX) closed down over $12 at $1067. The SPX broke through its support level at $1075. The next support level is at $1025-$1030. I am not suggesting anyone panic, but you definitely need to be sure you have contingent stop loss orders in place for all of your trades - this is a very volatile, and consequently, a dangerous market. You most likely will be whip sawed out of many trades, but that beats the alternative.

Some of us trade as though we were still in the era of full service brokers and high trading commissions. In that setting, we avoided trading in and out of positions because it eroded our gains quickly. Today's environment of online trading and discount brokers makes it very feasible to be stopped out of trades, reconsider the situation the next day, and re-establish the position with minimal cost.

My Nov iron condor on RUT stands at a P/L of +$2,340, position delta = +$33, and position theta = +$79.

Do you enjoy the thrill of the roller coaster? Follow your system and be diligent with your risk management and you will take much of the emotion out of this roller coaster ride.

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Written by Dr. Duke

Created: 23 October 2009

I was impressed with yesterday's strong bounce off of support and am also impressed with today's move right back down to those support levels. The markets opened up this morning and basically trended downward all day. Both the RUT and the SPX closed at or just above their support levels. RUT closed at $601 and SPX closed at $1080. Today's candlestick patterns are the classic bearish engulfing pattern or what is known as an outside day in the bar chart world. So after the market looked pretty solid yesterday after strongly bouncing off support, now it has driven strongly right back down to support. The key to watch for on Monday is definite break of these support levels.

My Nov iron condor is still in good shape with a P/L of +$2,600, delta = +$12 and theta = +$69. Hopefully, the consolidation of the past several sessions will continue and we can just sit and watch the time decay. But today's strong down move certainly has my attention.

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Written by Dr. Duke

Created: 22 October 2009

The markets opened in negative territory this morning and momentarily looked as though yesterday's shooting star candlestick was indeed an indicator of a trend reversal. But the indexes dropped, hit support, and started a steady climb upward that accelerated for the last two hours of trading to end the day with all of the stock indexes up across the board. RUT ran up $8 to close at $613 while the SPX closed at $1093, an increase of about $12.

My Nov iron condor on RUT now stands at a P/L of +$2,460, position delta of -$8 and position theta of +$84. My put spreads are now about two standard deviations OTM and the call spreads are about 1.5 standard deviations OTM. The iron condor spread is my "bread and butter" trade and my trading record now stands as:

June: +$4,600 or 29%

July: +$1,400 or 10%

August: -$810 or -5%

September: +$1,630 or 6%

October: +$715 or 6%

November: +$2,460 or 15% (still open)

Given the severe market volatility of the past several months, I am particularly pleased with this track record. Iron condors are easy trades during slowly trending or sideways markets, but 2008 and 2009 have been extremely challenging for all delta neutral traders. If you can successfully trade iron condors in this environment, I would dare say you could trade them anytime.

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Written by Dr. Duke

Created: 21 October 2009

The markets traded up and then basically sideways throughout the day and then did an abrupt about face with about one hour left in trading. It is hard to say what triggered the sell-off. Some suggested it was the downgrade of Wells Fargo that started all of the financials trading downward; some suggested the dollar hitting new lows was starting to worry some traders. The RUT dropped $8 to close at $605, just above support at $600. Similarly, the SPX dropped about $10 to close at $1081, just above its support at about $1080. Both of the SPX and RUT charts displayed a shooting star candlestick pattern today, often suggesting an imminent reversal of an up trend. In this case, we would want to see the SPX and RUT solidly break their support levels tomorrow to confirm that reversal.

My Nov iron condor is almost exactly delta neutral with a P/L of +$1,780, delta = +$2, and theta = +$108. Watch the market tomorrow morning carefully. I trust you have your contingent stop orders all in place??

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Written by Dr. Duke

Created: 20 October 2009

The markets were in negative territory almost all day. Many expected the good earnings announcements, led by Apple, to lead the market higher, but that didn't prove to be true. My view is that the earnings announcements have generally been considered as good or exceeding expectations based on profit growth rather than revenue growth (Apple was a notable exception). Companies have aggressively laid off workers and cut costs, resulting in gains in profitability, but those gains are temporary. When you couple this realization with some profit taking after an exceptional run upward for the past few months, some sideways consolidation is the best we can expect. But this presents a much more favorable market for our delta neutral trades.

RUT closed down about $9 to $613 while the SPX dropped $7 to $1091. The RUT is struggling to break through $625 while the SPX can't break $1100. My Nov RUT iron condor (20 contracts of the 520/530 puts and 680/690 calls) stands at a P/L of +$2,220, position delta = -$15 and theta = +$89. Perhaps Nov will be a nice boring month for us condor traders - it's about time! However, I still think there is a good chance of some unexpected economic data scaring this market, so keep your contingent stop loss order in place to close your put spreads in case of a sudden drop.

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Written by Dr. Duke

Created: 19 October 2009

The bull market is still intact, in spite of all of us doubting Thomases. The Russell 2000 Index (RUT) closed up about $6 to $622 while the S&P500 Index (SPX) closed up about $10 at $1098. RUT had a strong run upward this morning, but it stalled at the resistance level set earlier this year at $625. RUT has been trading just below $625 for four sessions now; it is looking for some news sufficient to break through $625. SPX broke through its resistance a few days ago and now appears to be struggling with the $1100 mark; for three sessions, it has bounced off of that level; today it broke above by a thin dime just for a couple of minutes.

As I am writing this blog, AAPL has not yet announced its earnings, but the weak price moves on AAPL Friday and then again this morning caused me some concern so I closed my AAPL double calendar for a loss of $850. My Nov iron condor stands at a P/L of +$1900, delta = -$36 and theta = +95. I will begin to look for opportunities to position my Dec condors within the next week to ten days.