Dr. Duke's Blog

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Written by Dr. Duke

Created: 18 February 2010

News of increased unemployment claims this morning (up 31k) plus the largest gain in the PPI since October 2008 (1.4%) had the market concerned about inflation and a possible raise in rates by the Fed in response. But positive news came with the Philadelphia Federal Reserve manufacturing index up in February by 15%. The market traded pretty much sideways through most of the day with the SPX and RUT both right at strong resistance levels. But the afternoon trading inched up and resulted in both the SPX and RUT closing above resistance, but not strongly and on reduced trading volume - so is it really a break out or will it pull back in the next few days? RUT closed at $629, up over $4, and somewhat above its resistance level at $625. SPX closed above the $1100 resistance level at $1107, a gain of a little over $7.

Even though a case could be made for the markets stalling here in this area of strong resistance, I decided my March iron condor was too close to the edge. I closed the 20 contracts of the $640/650 calls for $3.40 and rolled up to 660/670 for a credit of $1.23. I also closed the 20 contracts of 520/530 puts for $0.22 and rolled up to 570/580 for $0.80. I left the April $640 calls on (now up by $1200) until I am sure this upward move has ended or at least slowed. This brings my Mar condor to a P/L of - $2,050, delta = +$16 and theta = +104. The profit potential for this trade is now reduced to about $2300 - not great, but still in the game. This has been a crazy month! RUT was trading at $636 when we opened this trade, dropped 9% to $580 and then rose 8% to today's close at 629. These are the unusual months that your trading strategies must be able to survive for trading the condor long term to be feasible.

On a more positive note, today's close for RUT at $629 makes it reasonably certain that our Feb 540/550 put spreads will expire worthless (RUT settles in the morning); you may recall we closed the calls last Friday, so our Feb iron condor gained $2,794 or 17% on capital at risk. Next week, we will start to look at entering our April condor.

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Written by Dr. Duke

Created: 17 February 2010

Yesterday's strong move in the markets left RUT and SPX right up against strong resistance levels; they failed to break through today. In the case of RUT, the $625 level was set by the double top back in September and October of last year. The S&P 500 is facing the $1100 resistance level it found so difficult to break through late last year. RUT closed today just below the $625 mark, up less than $4. Similarly, SPX rose almost $5 but closed just a few cents shy of $1100. Housing reports this morning were mixed with housing starts up in Jan over Dec but building permits were down in January. This afternoon, the FOMC released the minutes from their last meeting; that insight into the FOMC discussions didn't seem to have much effect on the stock markets but it did help strengthen the dollar. Today's modest strength in the stock market was surprising in light of the dollar's trade upward today.

My Mar iron condor has been pushed far enough to have rolled both call and put spreads upward and now we have our long April calls in place as a hedge against continued a continued upward move. But that hedge is running out of steam. Our position P/L is now at -$1,150 with delta = -$106 and theta = +$78. The fact that delta now exceeds theta underscores the weakness of my position. I am watching this position very closely at this point; I won't allow the loss to exceed about $2,000 before I close and roll the call spreads. If RUT and/or SPX break through resistance, I will immediately close the call spreads.

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Written by Dr. Duke

Created: 16 February 2010

The Empire Manufacturing Index blew estimates out of the water first thing this morning, fueling the market. But the dollar had one of its worst days since November and the dollar is still strongly tied to the stock markets in inverse fashion. RUT closed up over $10 at $621 while the SPX ran up over $19 to close at $1095. RUT has a strong resistance level at about $625 and SPX is back within reach of its strong $1100 resistance.

My Mar iron condor stands at a net loss of $830, with a position delta of -$87 and theta = +$83. Our $640 calls now have a delta of 29; that plus the fact that our delta and theta values are close to one to one show the weakness of our position. I modeled adding one more long hedge and found that delta would increase to -$51, but theta would decrease to $65. So we are nearing the limits of our adjustment. If this bullish trend continues tomorrow, I may be forced to close and roll call spreads to keep this position out of trouble.

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Written by Dr. Duke

Created: 12 February 2010

A strong dollar and a disappointing consumer sentiment survey started the markets off this morning with losses. But, as the day wore on, the dollar gave back much of its gains and the market recovered most of its losses. The small and mid-caps outperformed the broad indexes today with RUT increasing over $5 to close at $611 while the SPX dropped almost $3 to close at $1076. Trading volume was up about 5% on the NYSE. Increased trading volume and strength among small and mid-cap stocks are bullish signs.

Today was a decision point for my Feb iron condors. The 640/650 calls were 1.8 standard deviations OTM, while the 540/550 puts were over three standard deviations OTM. So I closed the call spreads for $0.15. This leaves the position at a gain of $2,594. Presuming the put spreads expire worthless, we will be up $2,794 or 17% on our February iron condor.

At one point this morning, I almost removed the April put hedges on my Mar condors, but then the market strengthened. My Mar iron condor now stands at a P/L of -$890, delta = -$72 and theta = +$90. I almost bought one more April call hedge, but decided to hold off until Tuesday. That extra call would have cut delta in half but also reduced theta to about $74.

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Written by Dr. Duke

Created: 11 February 2010

Trading continued to follow the dollar in inverse fashion. The dollar was trading with gains relative to other currencies this morning and the market fell; then the dollar weakened and the markets took off. RUT closed up almost $10 at $605 while the SPX rose over $10 to close at $1078. Initial unemployment claims were better than expected this morning, but the dollar trade overwhelmed that news.

My Feb condors are doing very well at this point. The 540/550 put spreads are now over two standard deviations OTM and the 640/650 call spreads are more like 1.5 standard deviations OTM. The position stands at a gain of $2,614 with a position delta of -$2 and theta = +$136 - hard to be more delta neutral than that.

The Mar condor is being squeezed by today's upward move. The delta of the 640 calls hit 19 this afternoon, so I purchased two April $640 calls for $9.00. This position closed near breakeven with a delta of -$31 and theta = +$88. Without the adjustment, the position delta would have been -$87 and theta would be +$118. So our adjustment cut delta in half and reduced theta, but not terribly. If the market continues upward, I will be doing some "what if" analysis around adding one more long Apr call or simply closing and rolling the call spreads.

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Written by Dr. Duke

Created: 10 February 2010

The markets continue to largely track the dollar, which traded higher today based on both Bernanke's remarks prepared for the House Financial Services Committee as well as skepticism of a plan for Germany to bail out Greece's financial difficulties. RUT traded over a $10 range today but closed up less than a dollar at $596. The SPX gave up less than $2 to close at $1068.

My Feb RUT iron condor now stands with both call and put spreads right at plus and minus two standard deviations. The position is showing a gain of $2,234 with a delta of +$29 and theta = +$173.

The Mar RUT iron condor stands near breakeven with a delta of -$50 and theta = +$110.

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Written by Dr. Duke

Created: 09 February 2010

A pullback in the dollar and rumors speculating about a bailout for Greece resulted in a strong open this morning and then a wild ride in choppy action the rest of the day. RUT ended the day at $595, up almost $9. The S&P 500 gained almost $14 to close at $1071. Of course, the question on everyone's mind is whether the correction has ended or more pain remains. And you can get all kinds of answers to that one. Just reading the price charts, both RUT and SPX are in what I would call "no man's land" - an area with few strong support levels to assure us of stability. In the case of RUT, we are right in the middle of that area of churning for RUT back in November before the breakout in December. SPX broke a significant level of support at $1073 last week, and the next solid support level is down at $1030, which, coincidentally, represents a correction of about 10% from the highs in January.

Our RUT iron condors are faring well amid all of this consolidation, now that we have repositioned them. The Feb position now stands at +$2,274 with a position delta of +$17, and theta = +$135. The put spreads are now > two standard deviations OTM and the call spreads are just inside two standard deviations. My Mar condor is essentially at breakeven with delta = -$53 and theta = +$110. The short $640 calls have a delta of 16 and stand just inside one standard deviation. Without much economic news this week, the market is likely to be pretty choppy as rumors have more of an effect than usual.

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Written by Dr. Duke

Created: 08 February 2010

The markets seemed a bit lethargic today, largely trading sideways and weaker as the day wore on. The dollar strengthened throughout the day and that appeared to drive the major stock indexes lower. Trading volume was significantly lower as well. The RUT closed at $586, down over $6 while the SPX dropped $9 to close at $1057.

This sideways consolidating action was helpful for my condors after the required series of adjustments last week. My Feb iron condor now stands at +$1,614, delta = +$48, and theta = +$170. The Mar condor is near breakeven with delta = -$31 and theta = +$105. As I start to anticipate this coming Friday's decision point for our February positions, the Feb position is reasonably well positioned with the 640/650 call spreads at 2.2 standard deviations OTM and the 540/550 put spreads about 1.4 standard deviations OTM. We don't have any major economic announcements scheduled this week, so this choppy sideways trading may continue; however, news announcements concerning the financial stability of several European countries is the wild card (Greece, Spain, et al.).

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Written by Dr. Duke

Created: 05 February 2010

I enjoy roller coasters, but not in my trading. The unemployment rate was reported lower by 0.3% just as the market opened, but another 200k jobs were lost in January. That report just piled onto the concerns raised yesterday about the financial instability of several European countries and the markets traded lower all day. However, about an hour before the close of trading the dollar started weakening and the markets bounced back strongly and actually ended in gains for the major indexes. RUT closed up $3 at $593 after trading as low as $580 and the SPX dipped to $1044 before closing at $1066, up $3. What a swing!

The weakness in the markets this morning prompted me to do some major surgery on my positions (imagine my surprise toward the end of the market today). I closed the 560/570 put spreads in my Feb iron condor for $2.52 and opened 20 contracts of the Feb 530/540 put spreads for $1.03. As the market reversed itself toward the end of the day, I sold the Mar $580 put for $16.40. The end result of all of this was a Feb iron condor at 540/550 and 640/650 with a P/L of +$1,194, delta = +$25 and theta = +$184. This condor now stands almost perfectly at about one and a half standard deviations OTM in each direction.

My Mar iron condor was in even more fragile condition, so I completely restructured it as well (but no jobs were lost). I sold the Apr 570 puts for $21.80, closed the 560/570 puts for $3.10 and opened 520/530 puts for $1.15. I also closed the 670/680 calls for $0.30 and rolled down to 640/650 for $1.05. It is worth noting that a conservative trader could have simply thrown in the towel this morning and closed this Mar condor for a net loss of about $100. Thus, another reminder that trading the iron condor can be profitable without enduring large losses if you manage the risk properly. The new position at 520/530 and 640/650 now stands at a P/L of -$500, delta = -$38 and theta = +$100. The new call position is now right at one standard deviation OTM, much closer than I anticipated this morning when I rolled down. When this happens to you, repeat the mantra, "I played what the market gave me; I didn't try to predict what was coming". Don't second guess yourself.

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Written by Dr. Duke

Created: 04 February 2010

Asian and European markets led our markets downward over financial concerns for Greece, Portugal and Spain. The initial jobless claims for the week ending January 30 increased over the previous week; that didn't help the mood in the markets. Several retailers reported increased sales but that wasn't sufficient to change the mood. The only positive straw to cling to was that trading volume remained below its 50 day moving average, suggesting the institutions haven't begun panic selling (yet). But this was a huge down day, breaking several support levels. The SPX broke its long time support level at $1173 to close at $1063, down $34. RUT closed down about $21 to $590.

I adjusted both of my iron condors this morning, but those adjustments were nearly exhausted by the end of the day. I bought one Mar $580 put for $14.90 for the Feb condor and that position closed at a P/L of +$2,230, delta = +$64 and theta = +$147. Those Feb $570 puts now have a delta of 26. The fact that this position is down to about two weeks to expiration makes it a little less sensitive to this big down move - not so for my Mar condor. I bought two Apr $570 puts for $18.30 this morning, but by the end of the day, I had run out of room. My short Mar $570 puts now have a delta of 34. Unless the market rebounds first thing in the morning, I will be closing and rolling those put spreads. The Mar condor closed today with a P/L of +$610, delta = +14 and a pathetic tiny theta of +$1. What a day! But, all is not lost. Our positions are all still in the black and we have time for further adjustments to rebuild our gains.