Dr. Duke's Blog

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Written by Dr. Duke

Created: 03 August 2009

The SPX closed at $1002.63 today, the first time above $1000 since last November. RUT is also in new territory at $565.78, although it broke its November highs Friday. Favorable manufacturing index and construction spending reports this morning resulted in steadily bullish trading throughout the day, pushing all of the indexes to new highs on increased volume.

These persistent new highs are taking their toll on my August positions. My Aug iron butterfly, that I just adjusted on Friday, is already on the ropes, with P/L = -$3,420, delta = -$131, and theta = +$164. My Aug iron condor now stands at P/L = -$1,340, delta = -$104, and theta = +$116. Both positions are near my minimum of 1:1 for the theta/delta ratio. Unless we get some sideways or downward market moves soon, I will be closing both of these positions. But I will most likely be closing both positions for less than a normal month's gains - that is one of my iron clad rules. In fact, I nearly closed these positions today, but the relatively large theta values are keeping me in the trade for another day.

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Written by Dr. Duke

Created: 31 July 2009

The GDP report this morning had a mixed message that led to quiet, choppy trading. Second quarter GDP dropped by 1%, better than the expected -1.5%, but personal consumption expenditures dropped by 1.2%, worse than the expected -0.5%. This left the major indexes largely unchanged on lower trading volume. RUT closed at $556.71, down $1.09. Today's RUT candlestick was an even more classic shooting star than yesterday. The psychological profile behind the shooting star candlestick pattern is this: the market opens and the bulls push the market to new highs, but they can't hold those highs; the bears pull it back down to a closing price near the opening price. Often, this suggests a weakening of the bullish side of the tug of war. We'll see.

My iron butterfly position is in trouble. I decided to give it one more gasp for a profit by closing the 550/600 call spreads and rolling them to 570/620 and closing the 460/510 put spreads and rolling them up to 480/530. Please note that every time I roll these spreads up to follow this trend, I am putting more capital at risk and decreasing the potential gain if the trade eventually works out. Thus, I wouldn't recommend this tactic for everyone, so don't follow it blindly. My current iron butterfly position consists of two contracts each of the 570/620 calls, 560/610 calls, 480/530 puts, and 470/520 puts, with a P/L of -$2,612, delta = -$73, and theta = +$167. This adjustment restored a more reasonable theta/delta ratio and kept me in the game, but the maximum potential profit is diminishing.

My August iron condor is handling this bullish trend well so far with a P/L of -$895, delta = -57 and theta = +$148. We are near an area of the risk/reward curve where the downward steepness begins to be painful as our losses increase. The consolidation of the RUT price chart over the past few sessions has helped this condor position a lot as the time to expiration has ticked away. We started this iron condor with a potential profit of $4,000; under no circumstances do I want to allow this position to lose more than that potential profit. So I will be watching the P/L and the theta/delta ratio as we progress into next week.

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Written by Dr. Duke

Created: 30 July 2009

Wow! I just cannot believe the markets are this strong. Initial jobless claims reported a higher number than expected this morning, but the market still rallied. All of the major indexes were up about 1% or more. RUT closed at $557.80. Looking at the RUT price chart, you will note that the previous three sessions were stalled right at the high price set back in early November, but today's action broke through that resistance level. If you follow candlestick charts, you will recognize today's "shooting star", often a sign of a reversal of a bullish trend. On the other side of the coin, today's highs were set with higher trading volume - a bullish sign. The bottom line for me is that I don't see the economic basis for this rally, but we have to trade based on what the market gives us, not what we think it should be doing.

My Aug iron butterfly is nearly exhausted; the P/L is now -$2,812, delta = -$126 and theta = +$132. A one to one ratio of theta/delta is weak. I nearly closed this trade today, but the pullback in the last hour or two of trading persuaded me to give it another day. You might disagree with that decision and I admit it is borderline; I may be allowing my prejudice about this rally to influence me.

My Aug iron condor is in better shape with a P/L of -$655, delta = -$53 and theta = +$107. A two to one ratio of theta/delta is good, albeit minimally good. Our Sept $530 call is up by more than three thousand dollars at this point - that call is keeping this trade alive.

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Written by Dr. Duke

Created: 29 July 2009

All of the major indexes traded down today, but last hour buying, similar to yesterday, pared the losses back to around 1%. RUT closed at $548.38. The CBOE Volatility Index (VIX) has risen the past three sessions; a rising VIX suggests rising fear in the market. So we remain in this tenuous trading range, unsure whether it will basically trade sideways or if it is about to fall off the cliff. The rising VIX is measuring that fear.

My Aug iron butterfly sits at P/L = -$2,066, delta = -$86, and theta = +$156. Notice how our theta is slowly building as RUT essentially trades sideways; this is the advantage given the income options trader.

My Aug iron condor has a P/L = -$920, delta = -$21, and theta = +$148. The Sept $530 call we are holding to hedge our 570/580 call spreads is trading at $35 and about half of that is time value. While that is costing us some theta, we can't afford to sell it until the RUT makes a definite downward move. And $148 in theta is nothing to sniff at. So we continue to wait...

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Written by Dr. Duke

Created: 28 July 2009

The Conference Board's consumer confidence report weighed heavily on the market most of the day, but buyers appeared during the last hour of the market to restore most of the markets' earlier losses. The SPX closed at $979.62, down 0.3%. The RUT was down as far as $544 during the day, but rebounded to close at $551.95, a modest 0.2% gain. This rally seems to contradict the generally dismal economic news and appears to have staying power, but who really knows? The fact of the matter is that most of the people participating in the markets today are nervous, having lost their comfortable rules of thumb over the past few months. So the next economic report or earnings announcement could trigger a rally or a sell-off. Remain cautious.

My Aug iron butterfly position is largely unchanged from yesterday with a P/L = -$2,270, delta = -$99, and theta = +$140. The $140 per day of time decay is comforting, but this position is right on the edge of requiring additional adjustment.

My Aug iron condor is slightly improved at a P/L of -$825, delta = -$35 and theta = +$123.

So we wait and see what the market gives us tomorrow: a strong move upward and more adjustments, or a downward move with a sigh of relief.

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Written by Dr. Duke

Created: 27 July 2009

Today's trading in the markets was choppy and went back and forth all day. However, the bulls were able to finish the day with small increases in all of the major indexes. This market has surprising strength. I am expecting it to trade sideways if not slightly downward for a while here, but who knows? That is why it is crucial that you keep your positions properly hedged so that any one day's big move doesn't kill you.

RUT closed at $550.88. I took the opportunity this morning while the market was down a bit to adjust my iron butterfly by closing two 530/600 call spreads and rolling them up to 560/610 and closing two 450/500 put spreads and rolling them up to 470/520. This position now consists of two 470/520 put spreads, two 460/510 put spreads, two 550/600 call spreads and two 560/610 call spreads. It now stands at a P/L of -$2,498, delta = -$92 and theta = +$141. So we still have moderate risk to the upside if this rally continues, but our theta is at a healthy positive level.

My August iron condor position is unchanged with a P/L of -$1,155, delta = -$30 and theta = +$130. We still have one Sept $530 call hedging the upside, but our short $570 calls stand at a delta of 32, so we need this hedge. At this point, this position has a healthy positive theta and I can afford to be patient.

By the way, do you know any other options trading coaches/instructors who post their trades publicly every day so you can see if they practice what they preach?

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Written by Dr. Duke

Created: 24 July 2009

During a discussion with a fellow trader today, I said I often feel like a two headed monster: one head is trying to rationalize today's price moves and predict tomorrow's moves; the other head is ignoring all of the talking heads and simply responding to the market's moves according to predefined trading rules. I like to trade options with non-directional income generation strategies. To be successful with these strategies, it is essential that you quiet the part of your mind that is tempted to predict the market's next move. I think my ego is strongly tied to these predictive analyses because it is so attractive to think I outsmarted everyone else. As a result, I have found it very important to always doublecheck my rationale before making a trade. Am I listening to the right head?

Today, the markets traded basically sideways in a low volume, choppy market. This has been a remarkable run for the Russell 2000 Index: since July 10, we have had eleven trading sessions; nine have been up days with only two sideways to slightly down days. So a bit of a slow down isn't too surprising. The RUT closed at $548.46 and the SPX closed at $979.26, both up less than 0.5% for the day.

My iron butterfly position is essentially unchanged at a P/L = -$2,424, delta = -$83, and theta = +$89. My summary comments from yesterday are still applicable.

My Aug iron condor stands at a P/L = -$1,425, delta = -$8, and theta = +$122. I still have one of my Sept $530 calls protecting my $570/$580 call spreads. That protection plus a strong positive theta has me feeling pretty good about this condor position in spite of adjusting for both downside and upside moves this month.

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Written by Dr. Duke

Created: 23 July 2009

Today was a huge upside day for the markets. The talking heads attributed this rally to the recent better-than-expected earnings announcements. If you read any of those announcements carefully, there isn't much great news. But all of this is only rationalization after the fact - we should only trade what actually happens. RUT smashed through previous resistance to close at $545.85 and the SPX closed at $976.29, well above its old resistance level. As a result, today was a busy day of adjusting my positions - no more waiting for a pullback; time to preserve capital.

I closed the remaining 10 contracts of the 530/540 calls in my Aug iron condor for $6.10, a $2,000 loss. I then opened 10 contracts of the 590/600 calls for $0.90 or $900. I also sold one of the long Sept $530 calls for $33.60 for a $2,400 gain; I kept one as the hedge for my 10 $570/$580 call spreads, that are now being threatened by this surge upward. I then closed all 20 of the $420/$430 put spreads for $0.20, a $1,500 gain and opened 20 contracts of the $480/$490 puts for $0.90 or $1,800. The end result at the close was a position P/L = -$1,855, delta = +$1, and theta = +$130, so we have the theta/delta ratio back in a healthy position. Notice that our hedges have kept us in the game with the opportunity to salvage a profit before the August expiration month is over.

My Aug iron butterfly also required surgery today. I closed the one remaining $520/$570 call spread for $25.00 and the $530/$580 call spread for $21.00; then I sold two $550/$600 call spreads for $11.80. I closed two $440/$490 put spreads for $2.60 and sold two $460/$510 put spreads for $5.20. Thus, my current position consists of two 530/560 call spreads, two 550/600 call spreads, two 450/500 put spreads and two 460/510 put spreads. This position now stands at a P/L of -$2,290, delta = -$80 and theta = +$89. I like the $89 of theta, but the theta/delta ratio is minimally acceptable. The two 530/560 call spreads are weighing us down. If the RUT continues upward or sideways, I will have to roll those spreads upward.

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Written by Dr. Duke

Created: 22 July 2009

Patience is a necessary attribute of good traders as long as we define it properly. Some investors sit on losing positions, hoping the market will turn in their favor - that isn't patience. My iron butterfly and iron condor positions have now been hedged against further increases in the Russell 2000 Index (RUT) for about ten days. For the past two to three trading sessions, our positions have been sitting near the "tipping point" - not quite at the point of closing the positions and accepting the loss, but not yet at the point of removing our insurance either. Once you have properly hedged your positions, it takes patience to then give the market time to establish a direction that will drive your decision. Patience allows you to trade what the market gives you, rather than jumping into a trade based on your prediction of the market's next move.

RUT closed at $528.70 today after running as high as $531. Pull up the RUT chart and note that the highs on June 8, 9, 10, and 11 were all in this $531-$532 area. So RUT is paused right at resistance. The SPX closed at $957, just above resistance at $950. Today's SPX candlestick was the classic doji, suggesting indecision or a relative standoff between the bulls and the bears.

I decided to add one more contract to my iron butterfly today: one contract of the $530/$580 calls at $14.00 and one contract of the $450/$500 puts at $5.50. This position now stands at a P/L of -$716, delta = -$79, and theta = +$103. My adding the 530/580 calls betrays my expectation that we will either trade sideways at this resistance level or pull back from it. But I still have a reasonable positive theta and a breakeven up at $544, so I have given myself room to be wrong.

My August iron condor position remains pretty much unchanged at a P/L of -$950, delta = -$35, and theta = +$46. So, we patiently wait.

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Written by Dr. Duke

Created: 21 July 2009

The markets continue to teeter on the edge; the SPX and RUT both appeared to be pulling back from resistance levels set in early June, but reversed course mid-day and closed near where they opened, with minimal net change. My positions are hedged against further upside movement, so I am simply waiting for the market to decide whether it will break resistance and set new highs or pull back.

My iron butterfly stands at P/L of -$797, delta = -$47, and theta = +$75; my breakeven on the upside is $542, so I have some room for this position to be profitable and a reasonable positive theta while I wait for the market to choose a direction.

My Aug iron condor stands at a P/L = -$740, delta = -$37, and theta = +$37. This is a minimal theta/delta ratio of 1:1, but the long Sept $530 calls have me effectively hedged up to about RUT = $540, so I can patiently wait.

At this point, either the market breaks to the upside and I close my positions for minimized losses due to the adjustments, or the market pulls back and I have the opportunity for these positions to play out for a profit. The adjustments allow me to patiently wait rather than trying to predict the market and hope I am right.