Dr. Duke's Blog

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Written by Dr. Duke

Created: 01 September 2009

An old Wall Street saying is to "buy the rumor and sell the news". This morning's market saw favorable reports for the ISM Manufacturing Index, July construction spending, and pending home sales for July. But the market's favorable reaction didn't last long; by mid morning, all of the indexes were falling significantly. The rationale was that all of this good economic news was priced into the market in the recent rally, so profit taking ensued. The SPX closed at $998, near its long term support level of $1000, and RUT closed at $558, just above its $550 support level.


The downward moves of the past few days have been helpful for my iron condors. The Sept condor stands at a P/L of +$1,690, delta = +$17, and theta = +$199. So we are very close to delta neutral with theta decay generating about $200 per day. The Oct condor still has 44 days left in it and this market has left the RUT near the midpoint of this condor; normally, I would be looking to roll up or down one side or the other and take some profits here, but the increased IV has prevented that so far. Currently, the Oct condor stands at a P/L of +$70, delta = -$5, and theta = +$59. As long as the market doesn't "fall off the cliff", we will do nothing with these positions.

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Written by Dr. Duke

Created: 31 August 2009

Significant drops overnight in the Asian markets caused concern for traders here and those concerns even affected the commodities markets, with oil trading below $70 and gold trading down to $954. Some strengthening occurred late in the day that pared losses, so the market appears to have an underlying strength. Trading volume was up somewhat, but still at low values historically. RUT closed down over $7 to $572.

My Sept iron condor now stands at a P/L of +$2100, delta = -$30 and theta = +$165. The Oct iron condor stands at a P/L of +$70, delta = -$29 and theta = +$59. All of my short strikes are more than 1.5 standard deviations OTM at this point. But, as we have seen repeatedly in this market, all of that can change pretty quickly.

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Written by Dr. Duke

Created: 28 August 2009

Favorable earnings announcements and outlooks from Intel and Dell boosted the markets this morning, but the sellers came out of the woodwork and took their profits, driving the market down for most of the day. RUT closed down at $580 and the SPX closed down at $1029. It appears this market senses that all of the good news has already been priced into stocks and is prepared to take profits on any rally. However, the trading volume has been low, so drawing conclusions from the price movements this week may be dangerous. Perhaps the rally resumes after Labor Day when everyone returns to the floor.

This pullback has been a welcome relief for my condor positions. My Sept iron condor now stands at a profit of $1040, delta = -$103 and a theta of +$200. The short $620 calls are back to about one standard deviation OTM. The Oct iron condor now stands at a P/L of -$230, delta = -$39 and theta = +$57. Although the $460/$470 put spreads are now about two standard deviations OTM, I will resist the temptation to roll them up. That downside cushion is welcome as the market consolidates at the current levels.

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Written by Dr. Duke

Created: 27 August 2009

Several favorable economic reports this morning failed to impress traders and the market slid in low volume trading. But buyers came in to push the market back up and in most cases had turned the red ink into positive gains by market closing. The DJIA closed at $9581; SPX closed up by $3 at $1031 and RUT closed essentially unchanged at $583.77. The RUT chart has been trading sideways between $572 and $588 for the past four or five sessions. The question on everyone's mind is whether it will suddenly break out up or down, or just trade sideways to consolidate for a while.

I had begun to take off my long call hedges yesterday, and during the market's weakness this morning, I removed the balance of the hedges from both my Sept and my Oct condors. This morning, the deltas of my short Sept $620 calls had dropped to 11 and the short Oct $640 calls had dropped to 15. I sold the Oct $620 calls at $7.50 and the Nov $640 calls at $8.90. As the market rebounded, the deltas of the short Sept $620 calls and the short Oct $640 calls had increased to 14 and 16, respectively.

My Sept condor now stands at a P/L of +$130, delta = -$151, and theta = +$210. This is a higher delta than I would like; I may end up buying long calls again to hedge this position. This volatile market has a way of jerking these positions around. At this point, I have spent a total of $911 on both put and call hedges for this condor, but a potential gain of $3,800 remains.

My Oct condor now stands at a P/L of -$650, delta = -$52, and theta = +$60. Removing the Nov call today cost me $200 (my insurance premium). Aggressively hedging my iron condors does reduce my potential gains, but protecting my downside on these positions is crucial to long term success.

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Written by Dr. Duke

Created: 26 August 2009

Trading was choppy and basically sideways today on lower volume. A positive new home sales report this morning wasn't enough to push the market higher. The Russell 2000 Index (RUT) and The Standard and Poors 500 Index (SPX) closed essentially unchanged at $584 and $1028, respectively.

I track the delta of the short options in my iron condors as one measure of my risk. The delta of the September $620 call dropped to 15 today and the Oct $640 call dropped to 17. A delta of 15 for the Sept $620 call was sufficient for me to sell one of my Oct $620 call hedges at $9.00. This leaves my Sept iron condor essentially at breakeven with a delta of -$80 and a theta of +$175. What those numbers tell us is that the RUT can move up by $1 tomorrow and my position will lose $80, but the passage of one day of time will gain me $175. So I want to manage the position to keep theta much higher than delta.

The Oct $640 call delta dropped to 17, but I left the Nov $640 call hedge in place on the Oct iron condor - a borderline call. This leaves the Oct iron condor with a P/L of -$710, delta = -$24 and theta = +$47. These delta and theta numbers are smaller than for the previous trade because my October position consists of 15 contracts whereas the Sept position has 30 contracts. The Oct position also has far more days to expiration and I have only been in the trade for about one week.

If you are into market forecasting, the question is whether we are going to trade sideways and consolidate for a few weeks or whether a correction is overdue after such a large and quick run upward. Regardless of my forecast, I must be careful to only trade what the market does today and not what I think it will do tomorrow.

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Written by Dr. Duke

Created: 25 August 2009

Today's trading session was remarkably similar to the pattern yesterday with a rally in the morning and then a sell off to take back much, but not all of the gains. RUT closed up about $3 at $583.22 and SPX closed up about $2 at $1028. Bernanke's reappointment reassured Wall Street; they prefer the "devil they know" to the uncertainty of a new appointee. The Conference Board's consumer confidence index improved by more than was expected. Both of these positive notes appeared to overshadow the announcements from the White House and the CBO of even larger federal deficits than projected earlier. The country seems to have its head buried in the sand, hoping the financial crisis will go away.

During the market's strength this morning, I decided it was wise to add one more Oct $620 call for $10.10 to my Sept iron condor. At the market's close, this position stood at -$245, delta = -$62 and theta = +$149. This theta/delta ratio is healthy and gives us room for the market to move up further before radical surgery is required.

The Oct iron condor at 460/470 and 640/650 stood at -$605, delta = -$21 and theta = +$44. This position still has 51 days to expiration, so a theta/delta ratio of two or more is pretty good. We have one long Nov $640 call and no additional adjustment is required as yet.

The trading of late is settling into a routine: 1) I establish my positions and the market trades upward, 2) I don't think the market can continue to increase, but it does, so 3) I hedge my call spreads, and finally, 4) I close and/or roll my spreads - interesting times in the markets.

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Written by Dr. Duke

Created: 24 August 2009

The major market indexes all closed very close to their opening today. After a strong run-up in the morning, the selling began in the afternoon and pulled everything back. RUT closed at $580.24 after being as high as $586.

The market's strength this morning caused me to adjust both of my condors for September and October. I bought two Oct $620 calls at $9.80 for the Sept condor and the position ended the day at a P/L = -$610, delta = -$82 and theta = +$187.

I bought one Nov $640 call at $10.90 for the Oct condor and that position ended the day at -$820, delta = -$17 and theta = +$47. The improvement to the position from a risk management standpoint is apparent from the risk/reward curves before and after the adjustment; see how the risk/reward curve for today (red) is more vertical after the adjustment, indicating a smaller loss if the market continues upward. It allows us to hold the position and see if the market pulls back before closing the position, i.e., it buys us time. As it turned out, I probably didn't need to make these adjustments, but it is better to err on the side of caution in this business.

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Written by Dr. Duke

Created: 21 August 2009

Bernanke's assurance that the economy is beginning to recover and a better than expected Existing Home Sales report was all it took to bring the buyers to the table today. RUT closed at $581.51 and SPX closed at $1026.13, both indexes now at levels not seen since October of 2008. August settlement for the Russell 2000 index was $576.88, about $8 higher than Thursday's close. I have been keeping a spreadsheet for the past several years of the Thursday closing prices and Friday morning settlement prices for RUT and SPX. The average absolute change for RUT in 2009 has been almost $5 ($11 in 2008). For SPX the respective values are $9 in 2009 and $15 in 2008. That is why it is wise to close positions before settlement if there is any doubt about the index gapping up or down enough to hit your short strike - hence, my two standard deviation rule.

My condors are already starting to feel the heat from the bullish market this week. The Sept position stands at a P/L of ($770), delta = -$140, and theta = +$185, while Oct stands at a P/L of ($630), delta = -$43, and theta = +$53. The short call strikes have deltas of 17. These positions will require adjustment next week if this move upward continues.

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Written by Dr. Duke

Created: 20 August 2009

Higher jobless claims than expected only caused a momentary pause in the market this morning. By noon, everything was headed up for the day. The RUT closed at $568.68 and SPX closed at $1007.37. RUT is closing in on its previous high of $575 and SPX is back above the $1000 resistance level. This market continues to show significant underlying strength. On the other hand, the trading volume this week has been somewhat below historic averages, so the big players may be still waiting to make their move.

As I mentioned yesterday, I was planning to close my August $590/$600 calls if RUT moved up much at all. So I entered orders to close those spreads this morning. I entered my order at the ask price of $0.10 and left it out there for about 30 minutes. I have seen this before; when you get down to the last hours before expiration, the market makers don't have any interest in the worthless long options of our far OTM spreads (the $600 calls in this case). So I cancelled my order and bought back the $590 calls for $0.05, effectively closing that side of the condor. I will allow the $480/$490 put spreads to expire worthless. Assuming tomorrow's settlement price for RUT is above $490 (hopefully that is a safe assumption!), my August iron condor ends its life at a net loss of $810, or 5% on the capital at risk in this trade. One of my rules for trading the iron condor is to control my losses in these crazy months to less than the profit of a good month. Since we started this condor with hopes of a $4,000 profit, my $810 loss is very acceptable. This condor was one of the most active positions I have ever managed; note that I started with an adjustment early to protect the downside, and then scrambled for the rest of the time buying hedges and rolling spreads up in front of July's strong rally. It may seem bizarre to some people, but I am very proud of my $810 loss; the last 55 days have been a wild ride. To escape and only give up about 20% of a typical month's gains is a victory.

My Sept RUT iron condor stands at a P/L of +$160, delta = -$47 and a +$194 theta, so it is in an excellent position and no adjustments are necessary.

I opened an October iron condor on RUT today: 15 contracts of the $640/$650 calls for $0.90 and 15 contracts of the $460/$470 puts for $0.70, for a total credit of $2,400. Plus or minus one standard deviation spanned $499 to $630 when I established this position this morning. So the calls are just outside of one standard deviation, but I allowed extra safety margin on the downside. I just can't develop any confidence in this economy with record unemployment, foreclosures, bankruptcy and spiraling government deficits. Hence, I want some extra breathing room on the downside.

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Written by Dr. Duke

Created: 19 August 2009

Today's trading was erratic but ended on a reasonably positive note as the government's report of declining oil inventories boosted hopes for a recovering economy. RUT closed at $561.65 and SPX closed at $996, just under the psychologically significant $1000 mark. It appears the markets are "treading water" for a bit and the bull rally is still alive; however, it is a nervous market and some unexpected economic news could send it south in a hurry, so be careful. Have your stop loss orders entered and ready to automatically trigger.

My August iron condor stands at -$570, delta = -$7 and theta = +$298. The $590 call is over three standard deviations away from the current index price of $562. That $28 of safety margin is borderline. A $28 gap up in RUT for the settlement on Friday morning would be unusual, but it isn't unprecedented in the last several volatile months. Therefore, if the RUT trades upward tomorrow, I will close the $590/$600 call spreads and allow the $480/$490 put spreads to expire worthless.

My September iron condor stands at -$170, delta = -$28 and theta = +$193, an excellent theta/delta ratio. No adjustments are necessary.