Dr. Duke's Blog

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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.

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Written by Dr. Duke

Created: 02 December 2009

The stock markets opened mixed this morning and couldn't seem to develop a trend. The Dow, NASDAQ and S&P 500 were all close to unchanged. The SPX closed at $1109 up less than a dollar; it appears the 2009 high for the S&P 500 is providing solid resistance at $1113. RUT was the best performing broad index with nearly a $7 rise to close at $596. The issue of the Fed Beige Book didn't stimulate much trading one way or the other. The ADP employment report this morning was worse than expected with a loss of 169k jobs in Nov, but represented an improvement over the Oct loss of 203k. The dollar was somewhat stronger today and that has led to stock market selling recently but that didn't seem have much effect today.

My Dec iron condor now stands at a P/L of +$1,210, delta = -$87, and theta = +$154. The Jan condor stands at a P/L of +$240, delta = -$39 and theta = +$94. The RUT price chart consists of a sideways choppy trend between $575 and $603 for the past 18 sessions. This is perfect for delta neutral traders.

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Written by Dr. Duke

Created: 01 December 2009

Today's markets appear to once again be driven higher by weakness in the dollar. The $64,000 question is: when does a weaker dollar become a negative? Do you know the source for that metaphor? RUT rose over $8 to close at $588 while the SPX gained almost $14 to close at $1109. If you look at the SPX intraday chart, you will see another example of $1100 as a strong support level. Today's close on SPX is just shy of its 2009 high - will it break through? Today's economic news was weakly positive; home sales for Oct were up but November's manufacturing index was disappointing. Construction spending was expected to decline, but it came in flat - is that good?

My Dec RUT condor is moving into a good place as we move closer to expiration: P/L = +$1,530, delta = -$46, and theta = +$134. The put spreads are now over two standard deviations OTM while the calls are over one standard deviation OTM.  My Jan condor stands at a surprisingly positive P/L of +$540, delta = -$21, and theta = +$134. It is unusual to have an iron condor on for only one week and be in the black, at least for now. All the talking heads appear to be looking for a correction, so that may mean we will soon break into new market highs for 2009.

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Written by Dr. Duke

Created: 30 November 2009

By late in the day, the general market consensus appeared to be that Dubai's credit problems were not likely to spread across the globe. The markets opened up a little and then traded down and sideways until the last hour of the day. That last hour lifted the indexes into positive territory. RUT moved up almost $3 to close at $580 while the SPX closed at $1096, up about $4. Trading Friday and today exemplify what I have noted in this blog several times over the past few weeks - this is a nervous market. It doesn't take much to push it off the edge. However, rather than try to predict the next move of this market, I prefer to simply keep my positions relatively delta neutral and maintain robust risk management. Keep your stops in place and adjust when your system dictates.

For you chart readers and candlestick fans, take a look at the RUT chart. Today's candle was a classic hammer that often defines the support level and signals a reversal of the down trend. The low for the day was about $568 and the close was firmly back into the range of congestion from about $575 to $605 this chart has been mired in since early November. This pattern would suggest a continuation of this sideways consolidation or the beginning of a new up trend. I am more inclined to expect a continued period of consolidation following the strong up trend of the summer and early fall. But, as noted above, it won't take much negative news to push this market into a correction.

My Dec iron condor is in good shape with a P/L of +$1,450, delta = -$4 and theta = +$124 - your Greeks don't get much better than that! The Jan condor is standing at a P/L of +$140, delta = +$4 and theta = +$78. Again this position's Greeks are near perfect, and this is especially nice since this condor is relatively new. When you establish condors in the range of 45 days or more, the first week or two are the most dangerous to your position; adverse market moves in those early days can push you out of the trade pretty easily. In about 10 days or so, we will begin to look at closing down this Dec condor position.

See you tomorrow.

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Written by Dr. Duke

Created: 27 November 2009

Credit problems in Dubai sent Asian and European markets tumbling yesterday while we were having turkey with our families. Our markets gapped down at the open today, recovered a little bit and traded sideways for the balance of a shortened trading day. The big question on everyone's mind: will the markets continue down Monday or will today's drop be considered an over reaction? Either the problems in Dubai will be considered more isolated and the market will recover or analysts will see Dubai's problems as precursors to broader global credit issues and the market may correct even further. RUT dropped almost $15 to close at $577 while the SPX lost $19 to close at $1091.

My Dec iron condor on RUT stands at +$730, delta = -$10 and theta = +$137. This market pullback has brought the index almost equidistant between the short strikes. My RUT Jan iron condor  stands at +$80, delta = +$11 and theta = +$64. Now we wait for Monday's response. Are your stop losses in place?

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Written by Dr. Duke

Created: 25 November 2009

A surprisingly positive report of new home sales for October plus a 52 week low for the dollar kept the markets in positive territory today, but just barely. The low volume of trading typical preceding a holiday continued today and will likely also characterize Friday's short trading session (trading will close at 1:00 pm ET). The RUT traded mostly sideways today and closed essentially unchanged at $592, while the SPX made a modest $5 gain to close at $1111, just shy of its record $1113 for 2009.

My Dec iron condor now stands at a P/L of +$630, delta = -$84 and theta = +$122. The put spreads are now over two standard deviations OTM and the calls are right at one standard deviation OTM. The Jan iron condor on RUT stands at a P/L of -$100, delta = -$32 and theta = +$81. Holiday weeks are wonderful for income generation traders.

I wish each of you a wonderful Thanksgiving with your families. We have much to be thankful for.

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Written by Dr. Duke

Created: 24 November 2009

The markets opened up weak this morning and spent most of the day slowly making up ground, ending the day essentially unchanged. The Nov Consumer Confidence Index came in greater than expected and was higher than October as well, but that didn't have much effect on the market. The release of the FOMC minutes from the last meeting did not generate much response either. In general, the market seemed to be on vacation in advance of the holiday. RUT closed down $2 at $593 while the SPX was essentially unchanged at $1106.

I initiated my Jan iron condor today by selling 20 contracts of RUT call spreads at $650/$660 for $1.07 and selling 20 contracts of RUT put spreads at $510/$520 for $1.10. Plus and minus one standard deviation was $532 to $646 and I gave myself a little more safety margin on the bottom side. We brought in a total credit of $4,340 and have $15,660 at risk. I placed my contingency stop loss order to trigger at values of RUT < $543. At the close of trading today, this position stood at a P/L of -$160, delta = -$33 and theta = +$79. My Dec RUT iron condor stands at a P/L of +$530, delta = -$79 and theta = +$123. In some ways, this type of slow choppy market is boring, but it is wonderful for income generation options traders.

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Written by Dr. Duke

Created: 23 November 2009

The S&P futures signaled a strong open early this morning, based on a weaker dollar and bullish trading in the Asian and European markets. Stocks broadly rose at the open and the strong start was further fueled by a surprisingly strong existing home sales report; Oct sales jumped 10.1% to 6.1 million sales (5.7 million were expected). But shortly after that report, the market softened and traded slowly downward the rest of the day, but strong gains were retained. RUT closed at $595, up over $10 and the SPX closed up almost $15 at $1106.

My Dec iron condor on RUT now stands at a P/L of -$110, delta = -$85 and theta = +$139. The theta/delta ratio is weakening, now below 2:1. My short $630 calls are standing at a delta of 16, well below where I would pull the trigger on an adjustment. In addition, there are many technical signs that this market is overbought, plus trading during this holiday week isn't likely to move strongly in either direction. So I am not inclined to worry about this position at this point. Market trading volume was below average today and will likely diminish as the week progresses. I will be looking to establish my January iron condor tomorrow to take advantage of the holiday.