Dr. Duke's Blog

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Written by Dr. Duke

Created: 08 July 2009

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.

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Written by Dr. Duke

Created: 07 July 2009

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.

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Written by Dr. Duke

Created: 06 July 2009

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.

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Written by Dr. Duke

Created: 02 July 2009

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.

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Written by Dr. Duke

Created: 01 July 2009

The markets moved higher again today. I'm not sure why - I suppose traders are interpreting all news as optimistic. The RUT closed at $517.46, right in the neighborhood of resistance set in January ($519) and then in early May ($512). The market shrugged off a pessimistic report from payroll-processing giant ADP and the consulting firm, Macroeconomic Advisers, reporting that private sector jobs fell 473,000 in June. Tomorrow's non-farm payroll report is not likely to be rosy, but it is unclear how this market will respond.

Our July iron butterfly is getting close to requiring an adjustment with a position delta of -$90 and theta = +$182; our theta/delta ratio is still strong, but if the market continues up in the morning, I will have to decide whether to adjust tomorrow or take some risk and defer to Monday. Since this position has a good chunk of profit and we have a three day weekend of time decay, it will be very tempting to postpone the adjustment decision.

Our August iron condors are fine with position delta = -$56 and theta = +$92; the $570 call's delta is 15. I think it is unlikely we will have to adjust this trade, but if the short call delta reaches 18-20, I will adjust even though I won't understand why this market is so strong. But we have to remember to follow our rules rather than attempting to predict the market's moves. It is prudent to watch the market closely and do your best to anticipate its moves, but it is imperative that we never get into the position of thinking something like, "the market can't continue to move up, so I am not going to adjust my position because I am sure it will pull back". In general, we want to respond to the market's moves, rather than predicting its moves. Trade what you see, not what you think is coming.

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Written by Dr. Duke

Created: 30 June 2009

The markets traded lower today due to some weak consumer confidence readings (no surprise there), but trading volume picked up a bit later in the day. The Russell 2000 index (RUT) closed at $508.28 so our trades remain on solid ground with only minor changes in the numbers.

Our July iron butterfly continues on solid ground with a position delta = -$34 and theta = +$174; note how the time decay accelerates as we near expiration. Review the previous blogs from June 22 to today and note the trend in theta.

Our Aug iron condor stands at a minimal gain of +$40 (This is really irrelevant at this point since we are only a few days into this trade), delta = -$35, and theta = +$78. The delta of our short options are unchanged at -11 for the $430 puts and +12 for the $570 calls, so no adjustments are called for as yet.

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Written by Dr. Duke

Created: 29 June 2009

Today, the markets largely traded sideways on lower volume. This is typical of shortened holiday weeks on Wall Street; the exchanges are closed Friday for Independence Day, and many traders take off a few days early for the holiday. Of course, this environment is perfect for our nondirectional trading strategies that benefit from time decay.

The RUT closed at $510.61. Our July iron butterfly stands at a $2500 gain, delta = -$45 and theta = +$161, so this trade is in good shape and no action was necessary.

Our Aug iron condor stands at a minimal gain of +$220 (This is really irrelevant at this point since we are only a few days into this trade), delta = -$42, and theta = +$85. The delta of our short options are at -11 for the $430 puts and +12 for the $570 calls, so no adjustments are called for as yet.

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Written by Dr. Duke

Created: 26 June 2009

I established my August iron condors today with 20 put spreads at $420/$430 for $0.95 and 20 call spreads at $570/$580 for $1.05, for a maximum potential gain of $4,000 on $16,000 at risk or 25%. Breakevens are at $428 and $572. I will adjust either side if the delta of my short strike reaches 18. I have "leaned" this condor bearish with a position delta of -$46. A more delta neutral position would have used the 580/590 strikes. In my opinion, this market will not rally sufficiently to reach $570, so I chose to receive the larger credit for the 570/580 spreads. The trade-off is that if I am wrong and the RUT continues to move up strongly, I will be adjusting this position early and perhaps closing the call spreads altogether.

Our July iron butterfly at 450/480 and 530/560 was positioned at the market close today with a gain of $1,795, position delta of -$52 and position theta of $152. So this position is still in good shape and we will continue to hold.

Here is a summary of the trades we have completed since this blog began:

June iron condor: $4,600 gain or 29%

June iron butterfly: $1,470 gain or 6.3%

July iron condor: $1,300 gain or 9.8%

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Written by Dr. Duke

Created: 25 June 2009

The markets all continued to rally upward today, with the Russell 2000 index, RUT, closing at $509.18. I will be watching to see if this rally is strong enough to break recent levels of resistance: the first is around $515 (RUT hit $512 on May 8 and $519 on January 6), and $536 was the recent high set on June 5. Breaking previous levels of resistance is one of the signs of a strong rally.

I have closed all of my positions at this point except the July iron butterfly on RUT at 450/480 and 530/560. It currently stands at about $1,400 of profit, delta = - $40 and theta = $151. Our theta/delta ratio remains above 3:1, a good spot. So we will continue to hold this position.

I will be looking to establish my August iron condors tomorrow morning.

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Written by Dr. Duke

Created: 24 June 2009

I am writing this just before the market closes today; the Russell 2000 index (RUT) stands at $494.03.

I closed the remaining put spreads of my July iron condor today. You may recall we established this trade on June 12 and closed the calls yesterday for a $2,800 profit. With the market's upward action today, I was able to close the put spreads for $2.20, for a $1,500 loss; thus our condor achieved a net gain of $1,300 on 20 contracts, or 9.8% in 12 days. Now, you may wonder why I closed the puts so aggressively when the market was moving away from those spreads. The answer is: whenever I close one half of a condor, I am especially aware that I now am exposed to the market continuing to move in that direction. When I have both my call and put spreads in position, and the market moves strongly downward, my puts are in trouble, but my call spreads are becoming more profitable and hedging my position, i.e., they are softening the blow to my profit/loss. But once I close those calls and take my profit on that side, I am exposed if the market continues downward, so I am aggressive in closing the remaining position in these situations. And 10% in 12 days is nothing to scoff at. At the beginning of this trade, we planned to be in the trade for about two weeks; as it turned out, that was a good prediction.

In the meantime, our iron butterfly at 450/480 and 530/560 stands at about $800 of profit, delta = $33 and theta = $121. Our theta/delta ratio is back above 3:1, a good spot. So we will continue to hold this position.