Dr. Duke's Blog

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Written by Dr. Duke

Created: 16 December 2009

The large cap indexes opened up in positive territory this morning and traded sideways until the FOMC announcement this afternoon. Then a sell-off began and erased most of the gains. The SPX gained $1 on the day to close at $1109. But the small and mid cap companies in the RUT index behaved more positively and gave back less of their early gains. RUT closed up $5 at $611. The FOMC conformed expectations for continued low interest rates but also said that most of the emergency lending support measures will end in early 2010. That served to strengthen the dollar which appeared to push the stock market lower. In any case, the same pattern remains: basically a sideways trading market with bulls and bears basically in balance.

My Jan 510/520 and 650/660 iron condor on RUT stands at a net profit of $1,480 with delta = -$79 and theta = +$118. The Jan 570/580 and 630/640 iron condor stands at a P/L of +$50 with delta = -$38 and theta = +$68.

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Written by Dr. Duke

Created: 15 December 2009

The market opened on a down note this morning, based on the increase in the November Producers Price Index, and a surprising drop in the Empire State Manufacturer's index, a survey of New York state manufacturers. The Empire index came in at 2.6 for December, down from 23.5 in November. This is the lowest value since July. But the market shook that off and recovered most of the losses through the balance of the day, but then sold off to about where the markets opened. RUT closed at $606, down $3 while the SPX closed down $6 at $1108.

It appears to me that the bulls are not sufficiently concerned about this market to sell and take their profits off the table, but they aren't willing to continue buying either. A significant piece of economic data is required to tip this market one way or the other. Next stop: the FOMC announcement tomorrow.

My Jan condor on RUT at 510/520 and 650/660 stands at a net profit of $1,180 with delta = -$84 and theta = +$118. My latest RUT condor at 570/580 and 630/640 stands at a P/L of -$50, delta = -$36 and theta = +$63.

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Written by Dr. Duke

Created: 14 December 2009

The markets opened in positive territory this morning on overnight news that Dubai World appears to have solved its debt liquidity problems, at least for the time being. And Exxon-Mobil announced its planned acquisition of XTO Energy this morning; this encouraged investors that the merger/acquisition business may start to resume. The dollar traded downward today, which probably helped stocks to trade higher, although that influence appears to be waning. The Russell 200 Index (RUT) traded up steadily all day to close at $610, an increase of over $9. Trade in the S&P 500 (SPX) was more choppy, but closed up almost $8 to close at $1114, a new closing high for the year (the year's high of $1119 was intraday).

The strong increase in RUT pulled the P/L of my Jan iron condor back a bit to +$940, with a delta = -$86 and theta = +$121; the delta of my short $650 calls is just under 16. I decided to add a new Jan condor on RUT with 10 contracts of the 630/640 calls at $2.55 and 570/580 puts at $2.10. This is a shorter term (31 days) iron condor with the spreads positioned much closer to the index (the calls are at 0.5 standard deviation and the puts are at 0.7 standard deviation). This is a more dangerous configuration of the iron condor and must be carefully managed; on the plus side, we should be in and out of this position much more quickly than our normal condors positioned out about 50 days or so. At the end of the day, this position stood at a P/L of -$100, delta = -$34 and theta = +$60. Traders are looking forward to the FOMC meeting later this week, but it is doubtful that they will make any moves that surprise the market. Of course, it is in precisely this complacent situation when any surprise has a huge impact.

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Written by Dr. Duke

Created: 11 December 2009

The markets traded lower this morning but then steadily gained all afternoon to close with small, but broad based gains. RUT closed up $5 at $600 and the SPX inched up another $4 to close at $1106. These market gains came in the face of a stronger dollar, which is a reversal of the trend of the past several months when stock gains appeared to be tied to a weaker dollar.

The 500/510 put spreads in my Dec RUT iron condors now stand at 4.2 standard deviations OTM and the 630/640 call spreads stand at 1.5 standard deviations OTM. I closed the twenty 630/640 call spreads for $0.25. I will allow the 500/510 put spreads to expire worthless. Assuming those spreads do expire worthless, our Dec condor will finish at a net gain of $2,450 or 15%. My Jan condor stands at a P/L of +$1,260, delta = -$53 and theta = +$108.

This Dec RUT iron condor trade has some lessons in it so let's perform the post mortem: it began with 20 contracts of the 500/510 puts and 20 contracts of the 660/670 calls for a total credit of $3,800 with 51 days to expiration. The RUT first threatened our put spreads and our total adjustments on the put side cost us $360. About that time, we closed the 660/670 calls for a gain of $1,100 and opened 20 contracts of the 630/640 calls for a $2,400 credit. But that move proved to be too aggressive since we then spent $2,090 protecting our call spreads as the RUT moved upward. If I had not rolled those calls downward, this condor would have finished at a gain of $3,440 or 21%. The lesson is: when your adjustment triggers are tripped, move promptly with the planned adjustment, but be very cautious about rolling spreads up or down in an attempt to increase your gains. You may be moving too close to the fire if the wind changes.

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Written by Dr. Duke

Created: 10 December 2009

Today's trading was again characterized by slow, choppy action with little overall direction.The SPX closed up over $6 at $1102 while the RUT traded down almost $3 to settle at $595. This market appears to be trapped in this range without sufficient confidence to drive higher, but also without a stimulus to start a downward trend. Most signs of economic recovery are muted, leaving traders without the confidence to buy strongly across the board. Recent unemployment numbers are a good example; a drop from 10.2% to 10.0% was greeted as good news by many, but the reality is that 0.2% in within the error of measurement. It is difficult to draw a confident conclusion one way or the other.

In the meantime, this channel bound market is perfect for my iron condors. The Dec RUT iron condor now stands at +$2,390, delta = -$44 and theta = +$180. Tomorrow I will look hard at closing the 630/640 call spreads, but the 500/510 put spreads will most likely be allowed to expire worthless. The Jan RUT iron condor at 510/520 and 650/660 has 35 days left but is well into the black with a net gain of $1,360, delta = -$33 and a positive theta of $97. Only one more week remains in the December options.

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Written by Dr. Duke

Created: 09 December 2009

Markets traded in a sideways, lackluster way throughout the day. Most of the day was spent slightly underwater, but the buyers came back in around 2:00 pm and pushed the markets back to miniscule gains. RUT closed unchanged at $598 while the SPX moved up $4 to close at $1096. This a wonderful market for delta neutral traders, but it certainly is boring.

My Dec RUT iron condor now stands at a P/L of +$2,150, delta = -$72, and theta = +$164. I will probably be closing the 630/640 call spreads this Friday or possibly Monday because they will most likely be within two standard deviations (now at about one and a quarter standard deviations OTM). I will allow the Dec 500/510 put spreads to expire worthless. My Jan condor stands at a P/L of +$900, delta = -$50 and theta = +$103. So we wait to see if we just continue this slow sideways march into the end of the year. Traditionally, the funds and institutions are buying toward the end of the year to shore up solid year-end numbers, so perhaps this market will hold in this neighborhood for a while.

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Written by Dr. Duke

Created: 08 December 2009

The markets opened up a bit this morning but then slowly declined through most of the afternoon. This appears to have been fed by the strengthening dollar that rose almost 1% today. RUT closed down almost $6 at $598 while the SPX seemed to be using $1090 as support today and closed at $1092, off over $11. Both of these indexes are continuing to trade in this narrow range that has held for about one month. The talking heads seem to be consistently talking about how the fundamentals do not support these market levels; my contrarian bias makes me look for a resumed up trend on that basis alone (although I happen to agree with the talking heads on this point). We'll see. In the meantime, just play what the market gives you.

My Dec RUT condor now stands at a P/L of +$1,530, delta = -$98 and theta = +$213. Today's move downward relieved some of the pressure on the 630/640 call spreads that now stand outside of one standard deviation OTM. Today's market also improved my Jan RUT condor with a P/L of +$540, delta = -$47 and theta = +$102. Those call spreads at 650/660 are also now greater than one standard deviation OTM. So, for now, all is well in iron condor land.

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Written by Dr. Duke

Created: 07 December 2009

Trading today was largely choppy and sideways, with few news events or other catalysts to move the market one way or the other. The indexes opened the day modestly higher, then traded sideways until about 2:30 pm ET, when stocks broadly sold off. But the indexes had recovered much of those losses by the close of trading. RUT closed essentially unchanged at $604 while the SPX closed down about $3 at $1103.

My RUT Dec iron condor stands at a P/L of +$990, delta = -$120 and theta = +$230 and the Jan condor stands at a P/L of +$340, delta = -$61 and theta = +$98. The call spreads in both condors are about one standard deviation OTM.

Many options educators will tell you that the market makers take all of the time value for the weekend out of option prices early in the afternoon on Fridays. Thus, it would pay you to close your OTM spreads Friday afternoon rather than wait until Monday, thinking you might gain from additional time value decay. I wanted to test this idea with the following RUT put spreads, currently held in several of my accounts: 500/510, 540/550, and 550/560. About 20 minutes before the close Friday, I checked the closing prices for these spreads and then compared those prices this morning after about 30 minutes of trading. RUT was up about $5 this morning, so I adjusted my put spread prices based on their deltas. What I found was I could close all of my put spreads at better prices this morning and only a small portion of that improvement was due to RUT's increase in price. My 500/510 puts could be closed this morning for $0.15, an improvement of $0.05 over Friday, for options with zero delta. My 540/550 puts could be closed this morning for $0.45, an improvement of $0.15 over Friday. Delta only accounts for $0.04 of this change. My 550/560 puts could be closed for $0.55, a $0.30 improvement over Friday, and only $0.10 of this improvement could be attributed to RUT's price change.

Based on this limited data, I conclude that some of the weekend's time decay may be priced into the options on Friday, but certainly not all of the time decay was accounted for in these RUT options this weekend. In every case, I would have been better off to have closed my put spreads this morning. So RUT market makers may begin to adjust for time decay to some degree on Friday, but clearly not all of the weekend's time decay was pulled out of these RUT options early this particular weekend.

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Written by Dr. Duke

Created: 04 December 2009

The Labor Department surprised investors this morning with good news: unemployment dropped to 10% and only 11k jobs were lost in November, a large difference from October when 111k were lost. As one might expect, this pushed the markets to new highs in the first few minutes of trading, but they couldn't hold those gains. Some of the morning's losses were recovered in the last hour of trading to keep the indexes in positive territory for the day. RUT closed up over $14 at $603 while the SPX set new 2009 highs at $1119 in the first few minutes of trading, but the sellers came in and took it back down. Like RUT, buyers emerged in the last hour to close SPX up $6 at $1106. The positive employment news also bolstered the dollar, up 1.4% today. The market run in early trading was unusual of late in that it flew in the face of the rising dollar. It appears this market is consolidating the strong gains of the past few months in a narrow range; since Nov. 10, the S&P 500 has traded between $1087 and $1119. Over the same period of time, RUT has traded between $584 and $607. It is no wonder our iron condors have been maintenance-free the past few weeks!

My Dec iron condor on RUT stands at a P/L of +$450, delta = -$127 and theta = +$205. The 630/640 call spreads are right at one standard deviation after today's move up. Recall my rule: on the Friday before expiration, I close spreads that are less than two standard deviations OTM. So it is appearing likely that I will be closing these spreads next week unless RUT pulls back a bit. The Jan RUT condor was pulled back into the red by today's move upward with a P/L of -$300, delta = -$66 and theta = +$102. The Jan 650/660 call spreads are nearing an area that will require adjustment if RUT continues upward.

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Written by Dr. Duke

Created: 03 December 2009

The markets traded weakly sideways through most of the day and then sold off broadly during the last thirty minutes of trading. Many traders are concerned about the jobs report in the morning and are taking some profits off the table until after they see the market's reaction. ADP's employment report yesterday is normally a pretty good leading indicator of the jobs report and its results were worse than expected for November, although it was still an improvement from October. The market is nervous. As always, be sure your contingency orders are in place. SPX closed down $9 at its strong support level of $1100 and RUT closed at $589, a loss of $7.

My Dec and Jan iron condors are not much changed from yesterday; the Dec position stands at a P/L of +$970, delta = -$87 and theta = +$207 while Jan stands at a P/L of +$440, delta = -$34 and theta = +$90. So far, so good. Barring any severe market moves, both of these condors are well positioned. So we now watch for the employment report in the morning and then see how this nervous market responds - hard to predict.