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The markets traded upward once again today, but trading volume dropped across the board - not as bullish as it might appear. SPX gained $11 to close at $1173 and RUT closed at $692, up $12. Trading volume in the S&P 500 stocks was down to 3.2 billion, down from yesterday and further below the 50 dma. Trading volume declined 4% on the NYSE and was down 3% on NASDAQ. The SPX chart is trapped in the range of $1120 to $1220. When one analyzes the various issues worrying the market (European debt, US debt and the lack of political courage to deal with the problem, intractable unemployment, etc.), it is hard to imagine any quick fixes. Therefore, range bound trading may be our environment for some time. Directional trading has to be very short term; Jeff Macke refers to this as a "Wolf Market": not bullish, not bearish, requiring the successful trader to trade in and out quickly. Directional trading is never easy, but when the "trend" is a matter of a few days, directional trades are particularly challenging. In this environment, trading delta neutral is very attractive. But the rub here is knowing how to adjust the trade as the market swings rapidly back and forth.
My September iron condors on RUT are cruising into expiration for a nice profit (13% and 17%). All of the spreads are in excess of two standard deviations OTM, so the probabilities of these spreads expiring worthless is very high. The Oct RUT iron condor stands at a P/L of -$2,600 with delta = -$57 and theta = +$128. The short calls have deltas of about 17 so we are close to requiring an adjustment if the market continues upward.
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After trading as low as $1136, the S&P 500 rallied late in the day to close with a gain of $8 at $1162. RUT also closed higher at $680, up $6. The European debt problem remained at the center of traders' worries this morning, and news that China may be considering buying a large portion of Italy's bonds rallied the market toward the end of the day. But a rally of this magnitude was surprising. All of the major indexes closed for gains today after seeing severe losses earlier. The SPX touched $1136 at the low of the day, a little below the low of September 6th, and almost exactly the low of August 26th. Many market analysts have been watching for a bounce off of support before triggering any buying - was this it? I don't know; the market remains very skittish, and we have not actually had the worst headlines yet: Greece defaults, etc. This market's weakness has been largely anticipatory of those headlines. The VIX pulled back to 39% today, but that is still pretty elevated. Some analysts believe we still have lower prices in store before we can rally, e.g., breaking the support on SPX at $1120 before trading upward. Trading volume in the S&P 500 was down from Friday at 3.4 billion, below the 50 dma. Trading on the NYSE was down 9% and trading volume on NASDAQ was down 3%.
My two Sept RUT condors remain open; both spreads in both condors are over two standard deviations OTM, so I have left the spreads open thus far. The Oct condor on RUT stands at a P/L of -$2564 with delta = -$46 and theta = +$139. The elevated volatility is pushing the P/L lower; the call spreads are one standard deviation OTM and the put spreads are over two standard deviations OTM.
I will continue to watch the major support levels on SPX for directional clues; until I see a definitive move higher or lower, I will only be trading delta neutral positions. At times like these, the delta neutral trade presents a very attractive alternative. It is nice to be making money without making any predictions about the market.
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The markets appeared to be treading water today as they waited on Bernanke's speech this afternoon (nothing new there), and then took some risk off the table in anticipation of the market's reaction tomorrow morning to Obama's speech this evening. SPX closed at $1186, down $13 and RUT lost $15 to close at $695. Trading volume was up a bit from yesterday at 3.3 billion shares of the S&P 500, but remained below the 50 dma. Trading on the NYSE was up 1% while trading volume on NASDAQ rose 10%. Markets tried to rise this morning but just could not hold the gains as traders slowly sold off all afternoon.
It is hard to anticipate what may ultimately move this market one way or the other. Personally, I doubt Obama's speech will be the tipping event. Traders are looking for some free enterprise rhetoric but this administration doesn't trust free markets. We may be stuck in this tenuous trading range for a while.
My two iron condors on RUT stand at a P/L of +$1564, with delta = +$27 and theta = +$133, and a P/L = +$3020 with delta = +$9 and theta = +$69. I will apply my Two Sigma Rule to these positions tomorrow and possibly close some of the spreads. The Oct condor is hedged and stands at a P/L of -$2100 with delta = -$7 and theta = +$61.
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Obama's jobs plan didn't impress Wall Street, and, if that wasn't bad enough, a resignation in protest at the European Central Bank stoked fears about the European debt crisis. Together, a session dominated by selling was the result. SPX dropped $32 to $1154 and RUT lost $21 to close at $674. Trading volume rose to 3.8 billion shares of the S&P 500, topping the 50 dma at 3.6B. Trading on the NYSE rose by 29% and trading volume on NASDAQ increased 4%. The major indexes closed near their lows for the day and remain firmly lodged in the trading range of the past several weeks.
The spreads of my September condors all passed the two sigma test, so I left them open, but will be watching them closely as we enter expiration week. Both positions are profitable at this point, but the 600/610 put spreads in the one condor are being pressured; they were almost two standard deviations OTM at the close. The Oct condor stands at -$1664 with delta = -$33 and theta = +$97. I removed the call hedges on this position this morning.
Have a nice weekend.
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The German court ruling that Germany may participate in bailing out European Union members sparked a strong rally around the world. SPX gained $33 to close at $1199. RUT closed at $709, up $29. SPX could not get past $1220 about a week ago, so that will be the level to watch this week. The VIX dropped to 33% today, but that is still reasonably high; it suggests that traders are still rather cautious; it will take very little stimulus to start the selling. Trading volume in the S&P 500 actually fell a bit from yesterday to 3.1 billion shares, below the 50 dma. Trading was also down by 17% on the NYSE, but was up 3% on NASDAQ.
Tomorrow could be another volatile day in the markets due to Obama's speech to Congress. (Trivia: do any of you remember the name of the movie where the Martians blew up Congress?)
I will continue to watch $1120 and $1220 as the critical support and resistance levels that are defining this trading range on SPX. I will be cautious about any directional trades until we definitively break one of those levels.
Our September iron condors on RUT are in excellent shape. The condor with the 600/610 put spreads stands at a P/L of +$1,384 with delta = -$2 and theta = +$215. The Sept condor with the 560/570 put spreads stands at a P/L of +$2,720 with delta = -$15 and theta = +$163 (both Sept positions with 20 contracts). Today's rally forced me to hedge my Oct iron condor on RUT, so it is underwater, but the Greeks show that it is well hedged with position delta = -$13 and position theta = +$57 (on 20 contracts).
I have partnered with Mike Parnos to host a seminar in Las Vegas November 19-20. We are restricting the number of attendees so we can have a very personal and interactive meeting. You can read more about the conference here.
