Dr. Duke's Blog

Details

Written by Dr. Duke

Created: 16 October 2009

BAC's and GE's earnings announcements seemed to set a sour mood for the markets today, with losses through most of the day, although some of the losses were erased in afternoon trading. The SPX closed down at $1088 and RUT closed down about $7 at $616. RUT closed at an intermediate support level at about $615. If market weakness continues Monday, the next support level is at around $600. The settlement value for RUT has not yet been posted, but RUT traded in the range of $612 to $619 in the first hour, so that is the ballpark for the October settlement value.

All of the options expired worthless in my RUT Oct 540/550 and 660/670 iron condor for a net gain of $715, or 6%.

The RUT Nov 520/530 and 680/690 iron condor stands at a P/L of +$1,960, delta = -$22, and theta = +83.

I closed my GOOG Oct/Nov $530 calendar this morning during the first few minutes of trading for $11.10, for a gain of $1,090 or 11%. The extreme IV of the Oct $530 calls disappeared instantaneously, but the IV decreased more slowly in the Nov calls, enabling my profitable exit. Actually, I was surprised at how much IV bled out of the Nov calls during the day; they went from about 35% to 23% . In contrast, the Oct $530 calls were at 99% yesterday. I didn't expect the IV of the Nov calls to be so pumped up for an earnings announcement in October.

The AAPL Nov/Jan 180/200 double calendar is essentially unchanged at a P/L of -$200, delta = +$48 and theta = +$85. However, watching the significant IV decrease in GOOG's Nov calls has me concerned about this trade. Weakness in AAPL's price today is also concerning. I may close this trade Monday if AAPL continues to look weak.

Details

Written by Dr. Duke

Created: 15 October 2009

Trading was choppy and generally negative today; late trading this afternoon erased much of the losses. RUT closed essentially unchanged at $623 and the SPX edged up to $1097. Today was the last day to trade the Oct RUT index options, but my Oct condor spreads remain > 2 standard deviations OTM so I allowed those positions to remain open into expiration. The Oct iron condor position will close at a $715 gain or a 6% gain on capital at risk. My Aug and Oct condors are excellent examples of the feasibility of using iron condors for monthly income generation. My Aug position lost $810 and the Oct position gained only $715 but the lesson is risk management. If you can salvage a small loss or even a small gain in the months where the market trends strongly against you, then this trading strategy can work for you.

My Nov iron condor stands at a P/L of +$1,700, position delta = -$29, and position theta = +$81.

I dabbled in a couple of speculative earnings announcement trades today - I normally emphasize conservative options trading strategies, but a little bit of speculation is OK (typically 5-10% or less of your portfolio). AAPL's earnings will be announced Monday and I established a Nov/Jan 180/200 double calendar today for $8,750 (10 contracts). Due to the earnings announcement, IV of the Nov AAPL options is elevated. I am predicting that IV of the Nov options will decrease rapidly early next week while the IV of the Jan options should remain about the same. This should give this position a nice head start. Of course, I also need AAPL to not trade up or down too far. The breakevens of this trade are at $174 and $209.

The other speculative trade was on GOOG's earnings announcement after the market closed today. I put on 10 contracts of an ATM Oct/Nov $530 calendar for $10,010 with breakevens of $504 and $560. GOOG is currently trading in after hours markets at about $540 so this trade appears to be working out just fine. Similar to the AAPL trade, this position benefits from the collapsing IV in the Oct call after the announcement. However, it is also predicated on GOOG staying within $504 and $560.

Details

Written by Dr. Duke

Created: 14 October 2009

The markets were pretty strong today, breaking several resistance levels. The Dow closed above $10,000 for the first time in over a year. I don't normally follow the Dow simply because it is a very narrow measure of the market with only 30 stocks. I believe the S&P 500 is a better overall measure of the market's action. SPX closed at $1092, solidly breaking through the previous high for this year of $1080, set on Sept. 23. RUT closed at $624, just shy of its high for the year of $625. It seems to me that these gains are too much, too soon, given the overall weakness of this economy. So I have tightened up the protective stop loss orders on all of my positions. A series of poor earnings reports from some of the big players scheduled this week could start that run for the exits. GOOG, IBM, and GS report tomorrow evening; GE and BAC report Friday. But, for now, one must respect that we are playing a bullish market trend and trade accordingly.

My Oct RUT iron condor is almost done with a P/L of +$670, delta = +$3, and theta = +$143. If tomorrow brings an exceptionally strong up day, I will buy back the 660 calls before the close. Today's run upward brought those calls just to the edge of two standard deviations OTM. The Nov RUT iron condor sits at a P/L of +$800, with a position delta of -$54 and theta = +$107.  In the meantime, earnings season is in full swing.

Details

Written by Dr. Duke

Created: 13 October 2009

The market traded largely sideways today with small losses at the end of the day. RUT closed at $612 and SPX closed at $1073. It appears the weakening dollar has run out of its ability to push the market higher. We also have some heavyweight earnings announcements coming this week. Johnson and Johnson's announcement was pretty good on the bottom line, but sales are weak. This underscores the fact that laying off people and other cost cutting measures are only a temporary fix. Announcements from JPM, GS, IBM, GOOG, BAC, and GE later this week will be watched closely. This market is looking for some good news to enable it to break through resistance at the 2009 highs or some bad news that leads to a significant pullback. Of course, failing either, we may just muddle along similar to today's trading - good news for delta neutral traders.

My Oct iron condor on RUT at 540/550 and 660/670 now stands at a P/L of +$535, delta = +$7, and theta = +$246. Both short strikes are 4-5 standard deviations OTM. My Nov RUT iron condor at 520/530 and 680/690 stands at a P/L of +$1,220, delta = -$13, and theta = +$93. Condor traders either are sitting around bored and watching the time decay build or anxiously adjusting positions as the market moves against them. There is a lot to be said for boredom. One warning: sometimes boredom leads to seeking out new trades or moving one's spreads in closer to the money. Don't. Trade your system.

Details

Written by Dr. Duke

Created: 12 October 2009

The market traded in positive territory most of the day but sold off in the last two hours. It appears to be a classic case of bouncing off of resistance, i.e., the highs for the year set a few weeks ago. RUT closed at $614 while SPX edged out a small gain to hold $1076. The high for the year in SPX was $1080 and today's intraday high before the sell-off was $1079. So the market will be looking for news or economic data of sufficient strength to push it through those levels. We are in the midst of earnings reports, so one or more of those may spark some enthusiasm, but I doubt it. The FOMC minutes will be released Wednesday and may spark a move. We may just wander sideways for a while.

My Oct condor is still within my two standard deviation rule, so I am continuing to hold those positions; the P/L stands at $460, delta = +$3 and theta = +$224. My Nov condor is also in a good position with P/L = +960, delta = -$26 and theta = +$96.

If you are thinking of entering a RUT Nov iron condor now with 38 days to expiration, I would consider the 680/690 call spreads and the 520/530 put spreads. Both of these positions are well outside of one standard deviation and the deltas of the short strikes are about 9-10. But I would try to get a minimum of $0.70; failing that, I would look at the next set of strikes closer in at 530/540 and 670/680; here the short strike deltas are about 12-13 and you are still outside of  the one standard deviation marks at $561 and $667. But remember to set your contingency stop loss orders. Be disciplined.

Details

Written by Dr. Duke

Created: 09 October 2009

The market continued its steady push upward today - nothing dramatic, but steadily upward. The dollar strengthened and the market rallied anyway, unlike recent days but the weaker dollar halted gold's climb upward. RUT closed at $615 and SPX closed at $1071, bumping up against its 2009 high. So it will be interesting to see if the market can push through that resistance level to new highs next week.

Both my Oct and Nov condors are in excellent position. Both short strikes of the Oct condor are greater than one standard deviation OTM, so I left those positions open. The Oct position stands at a P/L of +$520, delta = +$12 and theta = +69, while Nov stands at a P/L of +$1,000, delta = -$17 and theta = +84. So life is good as I just sit on the sidelines and watch the time value decay away.

Details

Written by Dr. Duke

Created: 08 October 2009

The markets continued their steady uptick today. Alcoa kicked off a positive session with better than expected earnings. But a weak T-bond auction put the brakes on in afternoon trading. RUT traded as high as $612, but closed at $608, while the SPX traded as high as $1071 but closed at $1065. The 2009 highs set a few weeks ago will serve as the next resistance levels this market must break to remain on this bullish trend: RUT = $625 and SPX = $1080. The dollar continued to trade downward and this pushed commodities to new highs; Gold closed at $1056. The question in my mind is when does a weaker dollar begin to weigh on this stock market?

I decided to take advantage of this market strength and roll my Nov 500/510 put spreads up to 520/530. I closed 20 contracts of the 500/510 puts for $0.55 ($640 profit) and opened 20 contracts of the 520/530 puts for $0.75. That brings my Nov condor to a P/L = +$660, delta = -$17 and theta = +$89. My Oct condor is still plugging along at a P/L of +$400, delta = +$3 and theta = +$94. My Oct 660/670 calls are just outside of two standard deviations OTM. If this market continues trending upward, I may have to close those calls. I will take a hard look at that question tomorrow afternoon.

Details

Written by Dr. Duke

Created: 07 October 2009

The markets traded most of the day in negative territory, but ended the day slightly up. RUT closed at $602 and the SPX closed at $1058. The markets continue on the bullish trend, albeit consolidating to a large degree lately. All in all, this is currently a good market for delta neutral strategies - a welcome relief from the strong trending market of a few weeks ago.

My Oct condor hasn't changed much from yesterday, but theta is starting to build as we near the final week of the October options' life: P/L = +$130, delta = +$18 and theta = +$135. Both short strikes are outside of two standard deviations at this point. The Friday before expiration is the time when I apply my "close or let go" decision. I will close positions that are under two standard deviations OTM; spreads that are greater than two standard deviations OTM will be allowed to expire worthless (but watched carefully). My Nov condor stands at a P/L of +$1,020, delta = -$11 and theta = +$76. This condor is positioned well right now, but we still have 43 days for the market to move against us. Stay tuned.

Details

Written by Dr. Duke

Created: 06 October 2009

Well, there is no doubting that we bounced off support at this point. RUT closed at $602, up almost $11 and the SPX closed at $1055. There was virtually no big economic news today. Some pointed to the Aussies bumping up their central bank's lending rate as an indication that the global economy is rebounding. But the important rule to always keep in mind is: don't try to predict or rationalize. Just trade what the market gives you.

This market is giving my condors exactly what they needed, moving the RUT back very close to equidistant between my spreads. The Oct condor has a P/L of +$160, delta = +$21 and theta = +$91. Each of the short strikes are now over two standard deviations OTM. My Nov condor stands at a P/L of +$470, delta = -$10 and theta = +$79. The Nov short strikes are each over one standard deviation OTM.

Details

Written by Dr. Duke

Created: 05 October 2009

The markets opened this morning and traded pretty choppily (if there is such a word) most of the morning, but afternoon trading was generally steady and strong. RUT gained $11 to close at $591 while the SPX gained $15 to close at $1040. The talking heads were all nervous before the opening bell this morning, wondering if last week's action was the beginning of a significant correction of 10% or more. I don't know what tomorrow may bring, but today's market appeared pretty solid. It seems the bulls who brought the market this far are still largely bullish and are content to just pause and consolidate, rather than take their profits and go to cash.

Today's market was kind to my condors. The Oct condor now stands at a P/L of -$395, delta = +$46 and theta = +$123. I may scratch out a profit from Oct after all! The Oct call spreads are now over two standard deviations OTM and the Oct put spreads are about one and a half standard deviations OTM.

My Nov condor now stands at a P/L of +$800, delta = +$5 and theta = +$68. So the Nov position is looking good so far.