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Confidence in the economy continues to grow and feed the rally in the markets. The Russell 2000 Index (RUT) closed up at $522.02, surpassing the recent high of $520 on July 1, and closing in on the high of $535 set June 5. I began hedging my Aug iron butterfly at 440/490 and 510/560 by rolling one of the pairs of spreads up one strike to 450/500 and 520/570 (closing one contract of the call spreads and one contract of the put spreads and opening new spreads one strike upward). This moderated the delta somewhat to -$69 with theta = +$68. I am not optimistic that RUT will break this next resistance level, so I didn't roll more than one strike upward. If I am wrong, then I will either roll further upward or close the trade.

My Aug iron condor stands at a P/L of -$880 with a delta = -$61 and a positive theta of $44. Our Sept $530 calls are effectively holding our losses in check, but our theta position is deteriorating. If theta goes negative or RUT breaks $535, I will close this position for a loss.

Note that hedging our position does not turn the trade into a winner, but it holds our losses to a reasonable number (our goal with the condor is to hold our loss to less than the original credit of $4,000, and buy us time for the market to pull back).

Losses are a necessary part of trading; learning the techniques to control and minimize the loss allows you to stay in business.

The market took off to the races today, buoyed by Intel's better than expected earnings announcement and favorable forecast for the third quarter. The FOMC minutes from June were released and the committee thinks the economy will be shrinking slower than previously expected - that's good news? The volatility of this market continues to amaze me. One day, it's doom and gloom and the next day everyone is optimistic and buying across the board. The RUT gapped open this morning and raced up over $19 to close at $515.64.

My iron butterfly is starting to feel the heat with a position delta of -$63 and theta = +$50; the break-even is $533. I set it up this way because we have resistance levels at $520 and $535.

My Aug condor is also feeling the strain. I purchased an additional Sept $530 call for $14.90 today. The position stands at a P/L of -$190, delta = -$59 and theta = +$50. Those September calls are minimizing our loss while enabling us to see if the RUT will break resistance at $520 and $535 before we "throw in the towel".

Trading volume was low today; stock trading results were mixed with modest increases across all of the market indexes. RUT closed at $496.52, up $3.21. This market is still quite volatile and capable of large moves in either direction on the quirkiest of data points, so you must watch your positions carefully. But, in general, we are trading in a choppy, sideways market - ideal for delta neutral income generation options trading.

The iron butterfly I initiated yesterday is sitting essentially at break-even with position delta of -$16 and theta of +$76.

My Aug iron condor stands at a small profit at this point; by all measures this position should be in adjustment mode: the delta of the short $530 calls = 23 and the debit to close the calls stands at about double the original credit. Buying the two Sept $530 calls yesterday was the right move. It was $1,920 well spent for insurance. This buys us time to see if this market is going to continue upward or not.

As you can see from following these trades, three attributes of the delta neutral options trader are essential: 1) patience - much of the time you are just waiting for time decay, 2) specific rules for adjustments, and 3) the discipline to follow your rules.

Strength in the financial sector appeared to boost the entire market today. The S&P 500 and the Russell 2000 indexes bounced strongly off the support levels they were toying with for the past few sessions. RUT closed at $493.31. I will be watching the next levels of resistance on RUT around $520 and $535. I re-established the call spreads for my August iron condor this morning. I would have preferred the 540/550 strikes, but I have another position with long $540 calls, so I dropped down to the $530/$540 call spreads for $1.40 (or $2,800 for 20 contracts). As it turned out, the market continued up strongly all day and I hedged my position by buying 2 Sept $530 calls at $9.60 in the early afternoon. This hedge will hold my position loss to less than $1,000 up to around $525-$530 on the RUT. This buys me time to see if the RUT bounces off its resistance levels at $520 and $535 before I pull the plug on this trade. At the close, the iron condor position stood at a gain of $280, delta = -$15 and theta = +$95.

I also established a new iron butterfly position late in the trading day with the $440/$490 puts for $13.70 and the $510/$560 calls at $9.55, for a total credit of $6,975 on 3 contracts ($8,025 of capital at risk). I positioned this butterfly with some bullish bias (positive deltas) because the RUT bounced so strongly off support today. I will plan to be in this position for two weeks or less.

Trading today was choppy with mixed results; there were some bright spots in tech stocks, but otherwise, it was sideways to downward for most stocks. Overall trading volume was low; maybe traders are waiting to see what the earnings announcements look like next week. RUT is holding at the support levels of mid-May, closing at $480.98. I am still waiting for a strong day in the market to re-establish the call spreads of my Aug iron condor. That position now consists of 20 contracts of the Aug 420/430 put spreads and 1 contract of the Sept 430 puts. The position delta stands at +$50 while theta = $26. This position now stands at a net profit of $345; my options analysis software predicts I could tolerate a move down to about $460 and hold the position loss under $1,000. So we continue to wait and see if the markets break support and drop toward the March lows or meander sideways from here (a rally doesn't seem probable).

The major indexes all traded close to sideways with lower volume today. The Russell 2000 index closed at $479.27. I took advantage of the little bit of upward motion this morning and closed the put spreads remaining from my July iron butterfly; I closed the 450/480 put spreads for $7.85 for a $1,750 loss. I had closed the call spreads for a $3,300 gain Tuesday; so the net gain on the position was $1,550 or 17%.

I also closed the 570/580 call spreads in my Aug iron condor today for $0.25 or a $1,600 gain. If we have a strong day in the market within the next few days, I will re-establish my call spreads. I don't feel too exposed with the put spreads since I have the long Sep $430 puts as a hedge.

It is interesting that the RUT has paused here in the neighborhood of support levels formed in early May. If we have some definitive moves upward from here, I will breathe a sign of relief and re-establish new call spreads for my condor. If it breaks support, we may be in for a severe leg downward. Those of you who follow chart patterns may see the head and shoulders pattern on the RUT and the SPX. That is traditionally seen as a topping pattern, so that would predict breaking support and forming another leg downward. But if that happens, I am hedged and will close the remaining spreads of my condor for much less than an average month's credit. That is risk management and it's essential for managing iron condors.

Today's market started out looking like we were going over the edge... sell everything!! But news from the Treasury auction appears to have brought some buyers back into the market and repaired some, but not all, of the damage. The S&P 500 closed for the second day below its 200 dma (200 day moving average), but it closed $10 above its session lows. This area of about $875 is the support level that the S&P 500 found back in May. That is why I found today's market action somewhat (not very!) encouraging; if we break this support level, it could get nasty. Today's trading volume was the highest in two weeks, but I am unsure if that is a good or a bad sign. I could argue stronger volume on the severe downward move throughout most of the day was very negative. However, one could also argue that the higher volume reflects confidence that the intraday lows were seen as buying opportunities. Reading tea leaves isn't easy.

RUT closed at $479.6. I still have the 480/450 put spreads from my July iron butterfly. Today's action wasn't sufficient to cause the entire trade to go into the red, so I decided to give it more time. This was a debatable call - a more conservative trader would have closed the puts at the open this morning and locked in a gain on the trade.

The market tripped the adjustment triggers on my Aug iron condors: the delta of the $430 puts hit 21 today. I bought one Sept $430 put and cut my position delta to +$30; the position theta = +$41, which gives us a weak, but acceptable, theta/delta ratio. The position P/L stands at +$210. This hedge should hold our position losses to under $1000 for RUT prices as low as $460 - and that's the point; we are buying time and giving the market a chance to recover.

Today's market was mixed and weak until around mid-day, when the major market indexes all turned bearish. The S&P 500 closed below its 200 day moving average and Nasdaq broke its 50 day moving average. John Murphy, the famous market technician, has long used a 13/34 exponential moving average crossover system on SPX to identify the overall market trend. Those EMAs crossed today, as the MACD touched zero, suggesting a new trend downward. The only glimmer of positive news was a preliminary report that trading volume on the exchanges was lower today.

The RUT closed at $484.25. I was out of the office today, but I had entered an order to close the call spreads of my July iron butterfly for $0.50 and that order was filled late in the day when the market traded downward significantly. That resulted in a gain of about $3,300 on the calls, but my 450/480 put spreads are about $1,100 underwater. This late in the month, time decay is helping that position each day, but I will be watching it very carefully now that my call spreads are closed. I will close those spreads this week, Friday at the latest.

My Aug iron condor stands slightly in the black (ca. +$200) with a position delta = +$35 and theta = +$62; the delta of my short $430 puts is -18 (I will adjust at 20); another measure for adjustment that I watch is the debit to close the put spreads, currently at $1.45, less than twice the original credit of $0.95. So this condor is close to an adjustment trigger, but if the overall market weakens significantly, I may simply close the put spreads rather than adjusting.

Conflicting signals on the economy resulted in mixed trading in the markets today. Oil and commodities prices fell and worried investors that worldwide demand was not recovering; on the other hand, the S&P 500 bounced off its 200 day moving average on increased trading volume. The Russell 2000 Index (RUT) closed down about $3 to $494.03. This volatile, chaotic, largely sideways movement in the markets is actually nearly ideal for our delta neutral trades. But the volatility makes it a bit unnerving.

Our July iron butterfly stands at +$3,160, position delta = +$67, and theta = +$192. Our theta/delta ratio remains strong; I am beginning to look at the optimum closing for this trade sometime between now and this Friday (one week before expiration). However, I am in a class all day tomorrow and will probably only have a few moments to check on this position. Assuming no severe market moves tomorrow, I will be closing this position later this week.

Our August iron condor stands at +$660, position delta = +$14, and position theta = +$74. Since I still have 45 days left, I am beginning to consider closing the 570/580 call spreads and rolling that position down. The advantage is locking in about $1,000 of gain; the disadvantage is the loss of safety margin if this market rebounds - and there is no predicting this market; actually, all of our attempts to predict the market may be a bit futile, but the effort makes us feel better.

It would be stating the obvious to note this market's erratic behavior. Yesterday, the pessimistic ADP private sector jobs report was ignored, and yet today's jobs report had almost identical data and the market tanked. All of the indexes dropped significantly; the Russell 2000 index dropped nearly 4% to close at $497.21. However, trading volume was low, so one has to wonder if this downward move will continue on Monday. A good rule of thumb to use when looking at a strong move in a stock or index price is to look at the trading volume for confirmation. A large price move on higher than average volume is more likely to be a sustainable trend. It is also worth noting that today's move has served to further strengthen the resistance level around $515 on RUT.

Our July butterfly now stands at a $2,835 gain with position delta = $39 and theta = +$167, an excellent 4:1 ratio. We are now under two weeks to expiration, so this position is gaining some breathing room.

Today's move pushed our Aug condor into a near perfect delta neutral position with position delta now at -$1 and theta = +$87.