Dr. Duke's Blog

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Written by Dr. Duke

Created: 31 December 2009

The markets opened down a little bit and traded very flat all day. Trading was at very low volume levels due to the holidays, but it appeared many traders wanted to take their profits before the year ended. The Russell 2000 Index (RUT) dropped over $7 in the last 30 minutes to close at $625, down $8 for the day. The S&P 500 (SPX) traded in a  similar fashion, closing at $1115, down $11 for the day, with about $8 of that loss in the last few minutes of trading.

This down move was helpful for my condors as we move into the last two weeks before expiration. My short term (31 day) condor on RUT stands at a P/L of -$1,050 with a position delta of -$31 and a position theta of +$114. The long term (51 day) condor stands at a P/L of -$600 with a delta of -$62 and a theta of +$228.

Thanks to each of you for your support this year. You have my best wishes for both a happy and prosperous 2010.

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Written by Dr. Duke

Created: 30 December 2009

The markets opened up in the red this morning and traded sideways and downward throughout the day. RUT was down as much as $5 at one point in the day, but rose over $4 in the last thirty minutes of trading to close unchanged at $633. SPX traded in a similar pattern, also trading upward strongly in the last thirty minutes to close up less than a dollar at $1126. The Chicago Purchasing Managers Index reported a value of 60 today, the highest level of this index since 2006. Surprisingly, it didn't move the market. While this market appears to have significant buying support that serves to hold it up in the face of selling pressure, there isn't sufficient conviction to really drive the market higher. Trading volume has continued to be at the low levels we saw last week, so we may not get a feel for the true nature of this market until after the New Year.

My low probability iron condor on RUT closed at a P/L of -$1,070, delta = -$39 and theta = +$106. The high probability RUT iron condor stands at a P/L of -$640, delta = -$78 and theta = +$213.  Our combined theta of over $300 will steadily pull us into profitability, assuming the indexes continue to trade sideways or even downward a bit. So on we go to the New Year's celebration.

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Written by Dr. Duke

Created: 29 December 2009

Markets opened trading sideways and basically traded choppy and sideways all day. Selling during the last 30 minutes of the day took the markets down; in the case of the SPX, this late selling resulted in it closing at its low for the day, $1126, down $2. RUT held up a little better, closing at $633, down less than a dollar.

My short term (31 day) iron condor closed at a P/L of -$1,050, delta = -$41, and theta = +$97. Some would call this a low probability iron condor and there isn't anything wrong with that term. But positioning of iron condors is a continuum and each extreme has its pros and cons. My longer term (51 days) or high probability iron condor stands at a P/L of -$600, delta = -$81 and theta = +$195. We are down to 16 days to expiration and theta is beginning to really kick in for us. RUT's push through resistance during the past week hurt both of these trades. But they are still well positioned to finish in the black. Remember, when you are trading the iron condor, focus on minimizing the losses; the gains will take care of themselves.

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Written by Dr. Duke

Created: 28 December 2009

The markets opened up this morning with modest gains and then traded slowly sideways and downward all day; but buyers came in during the last 30 minutes of trading and pared back some of those losses. RUT closed essentially unchanged at $634 while the SPX gained a little over $1 to close at $1128. I took this morning's trading as a sign of the bullish support underlying this market (and the last half hour confirmed that observation). So I decided it was time for some major adjustments for my condors.

For the 570/580 and 630/640 condor, I closed the 570/580 put spreads for $0.50 (gain of $1600) and opened new put spreads at 580/590 for $0.61. I closed the 630/640 calls for $5.43 (loss of $2880) and opened the 660/670 calls for $1.10 (all ten contract positions). I also sold the Feb $630 call for $23.80, a $400 gain. This position closed the day at a P/L of -$1220 and a delta of -$42 with a theta of +$95. So these adjustments moved our theta/delta ratio back to a better neighborhood, albeit at the expense of much of our potential profit.

For my 20 contract condor, I had closed the 500/510 put spreads Friday and only had the 650/660 call spreads on this morning. I closed the call spreads for $2.35 (a loss of $2560) and opened 20 contracts of the 660/670 call spreads for $1.10. I opened 20 contracts of the 580/590 put spreads at $0.61 and sold the two Feb 630 calls for $23.80 for a gain of $800. These adjustments moved this position to a P/L of -$940, delta = -$84 and theta = +$191.

So now my two iron condors have merged into the same position of 30 contracts of the RUT 580/590 puts and the 660/670 calls. We now have almost $300 of theta decay per day, but we are playing pretty close to the fire. I have contingency orders entered to protect the downside. I will continue to report these as two separate trades, since they will be entered in my trading record as two trades, one started at 51 days to expiration and one started at 31 days.

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Written by Dr. Duke

Created: 24 December 2009

New market highs were set again today with the major indexes having positive gains for five days in succession. But these highs are being set on very low volume; less than 300,000 shares traded on the NYSE where the average this year has been around 1.4 billion. But today was a shortened holiday trading session which accounts for some of the low volume. The jobless claims number fell more than expected and this probably fueled some of the move. RUT closed at $634, up around $3, while the SPX closed up almost $6 at $1126.

I closed the 510/520 put spreads of my Jan 510/520 650/660 condor for $0.20, a gain of $1800. Now I just have to manage my call spreads that are in trouble; the Feb 630 calls will hedge the position for the time being before I am forced to close the call spreads or roll them up (but I am running out of time). This condor now stands at a net P/L of -$670, delta = -$121 and theta = +$81. My 570/580 and 630/640 condor stands at a P/L of -$1385, delta = -$52 and theta = +$30. My modeling software suggests I can hold my loss on this position to around $2000 or less into the neighborhood of RUT = $648 to $650. That would represent a loss of about half of my potential profit. That's my target.

The big question is what happens next week when all of the traders return to the floor? Will they continue this strong bull run of the past several sessions?

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Written by Dr. Duke

Created: 23 December 2009

The markets opened up in positive territory today and backed off a bit after disappointing new home sales data was released. But a weakening dollar appeared to prop up the market and the major indexes held most of their gains into the close. Trading volume remained low, which makes these strong market gains the past few days rather surprising to me. I expected trading to be somewhat subdued this week with the holiday. The stock market prediction business is not for the faint of heart.

RUT ran up over $7 to close at a new high for 2009 of $631. The SPX closed for another 2009 high at $1121. Continued gains for RUT necessitated some adjustments in my Jan iron condors today. I bought two Feb $630 calls for $23.40 for my Jan 510/520 650/660 condor, resulting in a P/L at the close of  -$280 with delta = -$97 and theta = +$94. Normally I would have purchased the Feb calls at the short strike of my Jan positions, but since I was adjusting both condors in the same account, I just purchased three Feb $630 calls. I bought one Feb $630 call for $23.40 for my RUT 570/580 and 630/640 condor; at the close, it stands at a P/L of -$980 with delta = -$54 and theta = +$27. These deteriorating Greeks show the stress on the call spreads for these condors caused by the relentless push upward over the past several sessions.The Feb calls will accomplish two things for me: 1) limit my losses on these positions if the RUT continues upward, and 2) buy us some time for this market to pull back into a better range for these positions. It is proving to be an interesting week.

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Written by Dr. Duke

Created: 22 December 2009

Yesterday's buying continued today, setting new highs on the S&P 500 with a close at $1118. RUT closed near its highs for the year at $624.  Surprisingly, this occurred in the face of a stronger dollar and downwardly revised third quarter GDP data. On the other hand, November existing home sales were up over 7% from October. VIX hit a new low for the year as it dropped below 20, but trading volume was low, raising questions about the ability of this market to follow through.

These increases on RUT are beginning to squeeze my Jan iron condors with the P/L of my Jan 510/520 650/660 condor dropping to +$860 with delta = -$166 and theta = +$147. The RUT 570/580 and 630/640 condor stands at a P/L of -$230 with delta = -$80 and theta = +$72. Both condors will require adjustment if RUT moves up much more. So we will see what presents the market has for us this week...

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Written by Dr. Duke

Created: 21 December 2009

Friday I predicted: "next week is likely to be slow and lacking clear direction, given the holiday and fewer people on the trading floors". Well, so much for that prediction! Today's markets were strong from the start, pulled back late in the day, but then resumed their upward gains into the close. Even more surprising, this stock market surge came in the face of a much stronger dollar, breaking recent tendencies for the market to trade inversely to the dollar. RUT gained over $8 to close at $619 and the SPX gained almost $12 to close at $1114. Tomorrow brings the GDP and existing home sales numbers. If I were venturing a prediction, I would expect the market to give back some of today's gains tomorrow - at least, that has been the pattern for the past six weeks or so. But positive economic news tomorrow morning may trigger additional buying.

My iron condors on RUT are performing well: the Jan 510/520 and 650/660 condor is now up $1,920 with position delta = -$116 and theta = +$113. The short term Jan iron condor at 570/580 and 630/640 stands at a P/L of +$200, delta = -$80 and theta = +$76. Neither condor is near any adjustment triggers.

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Written by Dr. Duke

Created: 18 December 2009

After Thursday's strong down day, one might expect Friday's market to be up; at least, that has been a common pattern the past six weeks or so. Although Friday started out in the red, trading slowly climbed all day and had a final strong push during the last thirty minutes of trading. RUT closed up over $6 at $611 while the SPX closed at $1102, also up $6. Trading volume on the NYSE was the highest all year; normally, I would take that as a very bullish sign, but at least some of that volume was related to various options expiring. Positive earnings announcements from ORCL, RIMM and others certainly helped the market, but it seemed that the dollar giving back most of Thursday's gains did more for the market than anything else.

Friday marked the official end of my Dec iron condor on RUT as my 500/510 put spreads expired worthless to leave me with a gain of $2,450 or 15%. It is worth noting that this was not an easy gain; we had five adjustments and/or rolls during this trade. By contrast, my Jan 510/520 and 650/660 condor is now up $1,640 with 27 days to go and no adjustments whatsoever. The short term Jan iron condor at 570/580 and 630/640 stands at a P/L of +$500, delta = -$45 and theta = +$65.

Next week brings several economic announcements: GDP, home sales, personal consumption data, and the MI consumer sentiment index. Barring any surprises in these announcements, next week is likely to be slow and lacking clear direction, given the holiday and fewer people on the trading floors.

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Written by Dr. Duke

Created: 17 December 2009

Greece's debt problems appeared to be fueling a flight to safety out of competing currencies and to the dollar. The relationship of stronger dollar and weaker stock prices appears to be still holding. However, unemployment claims moved up a bit from last week and that didn't help the mood on Wall Street. RUT traded downward most of the day, but bounced off $600 and closed at $605, a loss of about $7 on the day. The area of $595 to $600 appears to be holding up well. By contrast, the SPX steadily traded down all day and closed down $12 at $1097, near its intraday low of $1096. Trading volume was up significantly, plus we didn't have buyers strongly entering the market late in the day as we have on recent down market days. That could be a warning sign.

This drop in RUT helped both of my Jan iron condors. The 510/520 and 650/660 condor stands at a P/L of +$1,940 with delta = -$61 and theta = +$114. The 570/580 and 630/640 condor I established a few days ago stands at +$300, delta = -$25 and theta = +$71. Trading the iron condor is emotionally challenging. At times like the past month, it is simply boring, while it can be a roller coaster ride as it was this summer and early fall. You must clearly have your trading rules in mind (preferably written down) and not allow yourself to manufacture new trades when bored or panic when the market moves against you and not make the adjustments in a timely fashion.