Dr. Duke's Blog

Details

Written by Dr. Duke

Created: 25 September 2012

 The markets rose this morning on positive housing and consumer confidence numbers, but then the averages slowly declined all afternoon to close at or near lows for the day. SPX lost $15 to close at $1442 and RUT closed at $839, off $13 for the day. Trading volume picked up with 2.7 billion shares of the S&P 500 trading. Trading on the NYSE was up 20% and trading volume on NASDAQ was up 15%. The VIX increased a little over one point to close at 15.4%.

The Case Schiller housing price index increased 1.2% in July and consumer confidence came in at 70.3, up from 61.3. These numbers boosted the markets, but the euphoria was short-lived. SPX traded as high as $1463 before starting its slow descent. SPX has nearly given back the huge gains after Bernanke's announcement of additional Fed easing last week. RUT has now given back all of those gains, closing today near the $840 support level that was established after Draghi's press conference on September 6. SPX is sitting just above its support in the region of $1430-$1440. If we draw a trend line for this latest market rally that started in early June on the SPX chart, the bottom edge of this upward trend is $1430. So $1430 on SPX is a significant "line in the sand". Breaking $1430 could signal a break in this uptrend.

My Oct iron condor on RUT stands at a net P/L of -$940 with delta = +$57 and theta = +$94. Our theta/delta ratio is still strong, but the put spreads are beginning to be pressured. So the debate intensifies: is this bullish uptrend for real, or is a significant market correction around the corner?

Details

Written by Dr. Duke

Created: 24 September 2012

The major market indexes continue to basically trade sideways, but when one backs up and looks at the longer term trend, it still looks like a bull market. The S&P 500 is up about 16% this year, which is much, much better than last year's flat performance. But many traders, including me, are nervous. There are many reasons to worry about this market, but it seems to be climbing the proverbial wall of worry. SPX dropped off $3 to close at $1457 and RUT lost $4 to close at $852. Trading volume was naturally down a lot after expiration Friday with 2.2 billion shares of the S&P 500 trading; trading on the NYSE was down 51% and trading volume on NASDAQ was down 27%. The VIX is holding up rather well; it closed essentially unchanged today at 14.2%.

RUT is starting to give back much of Bernanke's rally from last week, but SPX is holding most of those gains intact. There wasn't any economic data of import today; some talking heads claimed today's market weakness was due to Europe's economic woes returning to the forefront. But I couldn't find any news stories behind those suppositions. Maybe traders are just feeling the same way I am - there is so much bad stuff either going on (like Europe) or in the near future (like the fiscal cliff), I just find myself half expecting the other shoe to drop at some point. But so far, that has been dead wrong.

My October RUT iron condor stands at a net P/L of -$400 with delta = +$7 and theta = +$105. So this position looks pretty good - unless that crash I fear comes to pass...

Details

Written by Dr. Duke

Created: 21 September 2012

This was a slow week for the major market averages. SPX basically traded at $1460 all week. Today, SPX ran as high as $1467 before being pulled back to close unchanged at $1460. RUT closed unchanged at $856. Trading volume popped up on this expiration Friday with 3.5 billion shares of the S&P 500 trading. Trading volume on the NYSE increased 90% and trading on the NASDAQ increased 29%. VIX remains pretty low at 14%.

My September iron condor on RUT ends this weekend with the expiration of the 790/800 put spreads. That position ended up with a loss of $4,680 or 27%. This pulls our year to date record for the Flying With The Condor™ back to +30%, still an excellent record as compared with a gain of 16% for the S&P 500. The Oct condor stands at a P/L of -$920 with delta = -$24 and theta = +$113.

Enjoy your weekend.

Details

Written by Dr. Duke

Created: 19 September 2012

The markets are hanging in there at these relatively elevated levels. SPX closed at $1461, up $2 and RUT dropped $1 to close at $856. As I was looking over the SPX chart a few minutes ago, it struck me how much of a step-wise pattern SPX has traded in for the past six weeks or so. SPX managed to break $1400 in early August but then just traded sideways until early September when Draghi's press conference comments propelled SPX to about $1435. But then we trade sideways until Bernanke, not to be outdone by Draghi, gives the market a boost and sends it to $1460. And here we are, almost a week later, trading sideways at about $1460. What does that tell us? I think it shows the remarkable support behind this market. Have we solved the European debt crisis? Has the economic recovery in the states started to accelerate? Has unemployment started returning to "normal" levels? Has the dreaded and much talked about fiscal cliff problem been solved? In spite of all of those rather significant economic "issues", the market's rally is intact (in my corporate career, we were always counseled to cast "problems" as "issues" in our management discussions). This bull market is not to be denied. Consistent with that view, the VIX dropped again today to 13.9%.

Trading volume rose slightly with 2.6 billion shares of the S&P 500 trading (the 50 dma = 2.5B); trading on the NYSE rose 1% and volume on NASDAQ rose 9%.

We had another dose of mediocre economic data today. Housing starts for August came in at 750k, up a bit from the previous month's 733k. Building permits dropped form 811k to 803k, but existing home sales rose from 4.47M to 4.82M.

My October iron condor position stands at a P/L of -$1,480 with position delta = -$27 and position theta = +$119. The 900/910 calls and the 790/800 puts are both about one standard deviation or more OTM with thirty days to go to expiration.

In the "interesting observations" column, I have entered a wide OTM butterfly spread on AAPL each summer for the past several years using January LEAPS options. Each year, AAPL has run too far, too fast and I have been forced to close the spread early - a nice gain, but not the great gain planned if we had made it to January. So this year, I entered the 670/750/830 call butterfly with Dec options, but AAPL has already broken through $700 and shows every sign of trying for $750 earlier than December. We're up 49% but it looks like we may be closing early once again this year. You will be telling your grandchildren about trading Apple back in the old days - it is an amazing story.

Details

Written by Dr. Duke

Created: 18 September 2012

I missed yesterday's blog - it was the anniversary of my son's death and was also a busy day in the markets and my business. Consequently, by the time the markets closed, I was spent.

The big question in my mind is the title of this blog. After such a huge day last Thursday, it seems like all of the excitement about the Fed pumping up the market is spent. Markets were weak, both yesterday and today, but they aren't giving back much thus far. SPX closed down $2 at $1459 and RUT also gave up $2 to close at $857.  Trading volume in the S&P 500 dipped below the 50 dma to 2.4 billion shares today. Trading on the NYSE was flat and increased 15% on NASDAQ. The VIX is relatively low at 14.2% and actually decreased today, in a weak market. That tells me this market still has considerable underlying strength. SPX hit an intraday high around $1475 on Thursday but seems to be holding a solid support level around $1460. RUT broke its 2012 highs Thursday and appears to be establishing $855 as the near-term support. The $840 level was the support level defined before Thursday's run upward.

FedEx warned that they are seeing signs of a global slowdown, but that didn't seem to have a significant effect on the markets. Markets strengthened from about 2 pm ET through the close. There wasn't much in the way of economic data today; we get housing starts and building permits tomorrow.

My Sept iron condor position is essentially complete; assuming the remaining 790/800 put spreads expire worthless, I will take a loss of $4,680 on 20 contracts or 27% on capital at risk. That drops my year to date performance back to a 30% gain. I didn't control my losses on this position as well as I would have liked; I gave back two months of gains. The October condor stands at a net P/L of -$1,580 with delta = -$28 and theta = +$116. We have repositioned the call spreads to 900/910 and our maximum potential gain has been reduced to about 9%.

Isn't it about time for some dire news out of Europe?

Details

Written by Dr. Duke

Created: 14 September 2012

Bernanke and company have certainly lit a fire under this market. After a very strong day yesterday, the rally continued as SPX gained $6 to close at $1466 and RUT tacked on $9 to close at $865. Trading volume spiked up to 3.6 billion shares of the S&P 500 stocks; this is the highest trading volume on the S&P 500 since March, in the midst of the rally earlier this year. Trading increased 9% on the NYSE and was up 6% on NASDAQ. Oddly, the VIX opened lower at 13.8%, but actually increased by about a half point to close at 14.5%.

Some of the economic data released today was positive, starting with the University of Michigan Consumer Sentiment reading at 79.2 for September, up from 74.3. And retail sales increased 0.9% in August. But the balance of the data was mediocre with industrial production dropping 1.2% in August, capacity utilization dropping to 78.2% from 79.2%, and business inventories rising 0.8%. One could view the inventory data in a more positive light by suggesting businesses are seeing more demand for products and increasing production. But that may be a stretch. More likely, sales are soft.

In the past two instances of quantitative easing, the ensuing rally lasted for a shorter period of time after each announcement. Will this one be different since the Fed didn't specify a definitive end? Or will the euphoria wear off pretty quickly?

The only remaining positions in my September condor are the put spreads and the Oct call hedges. These positions are mitigating some of my losses. The current P/L of my 20 contract position is now -$3,820 or about 13%. I also closed the call spreads in the October position today. I will roll those up and reposition them as soon as this rally moderates a bit. This leaves the October position with a P/L of -1,720. The Greeks for either position aren't particularly relevant since these are no longer delta neutral trades. I rolled the 710/720 puts in October up to 790/800. As soon as I reestablish the call spreads, this position will be back in the black.

This has been a rough couple of weeks for iron condor traders. I will be happy to relax this weekend and leave the market behind for a couple of days.

Details

Written by Dr. Duke

Created: 13 September 2012

I will be traveling to Las Vegas to speak at the Forex and Options Expo shortly after the market closes today, so I will be unable to write my usual blog after the close. At this point in time, the market has responded very positively to Bernanke's policy changes. SPX is up over $23 to $1459 and RUT is up $11 to $857. VIX has dropped almost two percentage points to 14.3% as the market rallies strongly.

I must admit this strong move surprised me. I thought QE III had been sufficiently telegraphed that the market response would be mild, but that is certainly not the case.

RUT has trampled on my Sept condor; the market is still out on the damages, but a loss of the order of 30% for this month is my best guess at this point. I did not succeed in my usual objective of holding the losses to a good month's gains; I ended up giving back about two month's gains. But we remain in the black for the year and the October position is hedged and doing fine.

That's life in the trading game: sometimes you win and sometimes you lose; success is in minimizing the losses so that you remain positive over time.

Details

Written by Dr. Duke

Created: 12 September 2012

 The waiting game continues, but one of the big risk factors was taken off the table today. The German high court refused to grant the injunction to stop Germany's participation in the ESB (European Stability Mechanism). But, and that's a big "but", the court limited Germany's participation to 190 Euros without going back to the Bundestag (the equivalent of our House of Representatives) for approval. The ESM has not actually been formally approved by the Euro Zone countries, so any number of snags may appear in that process. Germany is the largest contributor to the ESM and many observers expect the required contributions to increase as the detailed plans are nailed down. So the European debt crisis is far from over, but the problem is sufficiently deferred for the markets to move on for now. The markets have a notoriously short attention span.

Next on the agenda is the FOMC announcement and news conference tomorrow. Personally, I think our biggest risk was passed by without any damage today (the German court decision). Depending on whom you speak with, some are claiming most traders and economists are expecting QE III is a "done deal"; others report just the opposite. That tells me that observers are split on whether QE III is needed or appropriate, so I don't expect a huge market move as a result of tomorrow's announcement. A great deal of the market's rise over the past several weeks is probably best attributed to Draghi's comments and anticipation of QE III, so we may well give back some of that if Bernanke delivers the usual message, "we stand ready to intervene if necessary..." But given today's gift of taking the European debt crisis off the radar temporarily, I don't expect a Bernanke disappointment to be devastating. On the other hand, the announcement of QE III could trigger a "sell the news" event.

SPX gained $3 to close at $1437 and RUT also gained $3 to close at $845. Trading volume dropped off a bit to 2.5 billion shares of the S&P 500, but remains above the 50 dma. Trading rose 6% on the NYSE and increased 5% on NASDAQ. The VIX dropped almost one percentage point to 15.8%.

My Sept condor position remains underwater at a P/L of -$3,940 with delta = -$93 and theta = +$418 (huge theta!). A big move up tomorrow could trigger closing the call spreads and lock in a loss for this position. The Oct condor stands at a P/L of -$810 with delta = -$62 and theta = +$79. The delta of our short calls is up to 21 so the pressure on the call spreads isn't too severe so far.

Get your popcorn ready for the show tomorrow.

Details

Written by Dr. Duke

Created: 11 September 2012

Ask any active trader this week what she is thinking and you will hear one or all three of the following: 1) AAPL's big show tomorrow, 2) the German court ruling tomorrow, and 3) Bernanke's announcement Thursday. But my sense is that the markets have decided that the German courts will approve the Euro Zone bailout and Bernanke will announce QE III. SPX gained $4 to close at $1434 and RUT gained $3 to close at $842. And this occurred on higher volume: 2.7 billion shares of the S&P 500 (50 dma = 2.4B). This appears to show traders taking bullish positions rather than taking their profits and hiding. If the German courts rule against the bailout, we could see a very ugly market to the downside tomorrow. I am inclined to think QE III is already baked into the current market levels, so if Bernanke continues to communicate the same message of the past few months (i.e., "we will act if necessary"), I doubt that will cause a huge downward move. In any case, the name of the game is waiting. VIX moved lower this morning, but then strengthened to close at 16.4% - hedging is the name of the game.

As mentioned earlier, we have the German court decision tomorrow, then unemployment claims, the PPI and Bernanke on Thursday. Friday brings the CPI and the consumer sentiment numbers. The next couple of days have the potential to be very volatile.

My Sept iron condor on RUT stands at a net P/L of - $3,300 with delta = -$30 and theta = +$298. Time decay is starting to help this position each day, but we are now sitting in a fairly narrow window of profitability. The October position stands at a P/L of -$170 with delta = -$45 and theta = +$70.

Now I will return to my "thinker" pose and wait...

Details

Written by Dr. Duke

Created: 10 September 2012

The markets shocked many traders last Thursday with that huge spurt upward based on what many would call vague promises by Draghi - it was the equivalent of, "Trust me. I'll fix it somehow." Perhaps even more of a surprise was the modest uptick Friday; I expected some profit taking after that strong rally. But today, traders found it hard to press the bullish case. The markets sluggishly trudged sideways most of the day and then weakened as we went into the final hours of trading. SPX lost $9 to close at $1429 while RUT lost $3 to close at $839. Trading volume fell off with 2.4 billion shares of the S&P 500 stocks trading; this is right at the 50 day moving average. Volume on the NYSE dropped 12% and trading on NASDAQ fell 9%. VIX increased nearly two points to 16.3%.

No economic news of any significance was released today. Everyone is focused on Wednesday's Fed announcement. Some analysts believe the markets have priced in the next round of quantitative easing, so an announcement of QE III may not greatly boost the markets - in fact, it could be a "sell the news"event. But what if Bernanke continues with the recent message of "we'll step in when we deem it necessary"? Will markets just wander sideways in disappointment or will that set off a profit taking selling spree? Bottom line: Wednesday could be a down market day whichever way Ben turns. We aren't likely to see much movement in the markets until the FOMC announcement.

My Sept iron condor on RUT is limping along with a P/L of -$3,810 with position delta = -$15 and position theta = +$323. Our adjustments have moved this position back to delta neutral and theta decay is starting to ramp up as expiration approaches. But this condor is in a precarious spot; in theory we could salvage a gain, but most likely we will be fighting to minimize the loss. The Oct condor position has also been hedged and stands at a P/L of -$260 with position delta = -$53 and position theta = +$70, so this condor is in pretty good shape.