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The markets slowly traded downward as the day wore on, but most traders were watching from the sidelines. SPX closed at $1324, down $4 and RUT has lost its supremacy, closing down $7 at $834. RUT has now traded below its 2011 high set in mid-February; the next support level is $830. Significantly, trading volume in the S&P 500 hit its lowest level of 2011 at 2.4 billion shares. Trading was down 1% on the NYSE but was up 28% on NASDAQ. After the bell, Alcoa beat earnings estimates but disappointed on revenues; we'll see if that sets the tone for tomorrow's trading.
I removed the hedge on my RUT May iron condor position today. That leaves me with a P/L of - $1,318 and delta = -$34 and theta = +$94. The theta/delta ratio of about three-to-one is excellent. If RUT continues roughly sideways to down for a few weeks (38 days left), we will salvage a profit from this position. That is the advantage of a hedging adjustment rather than closing spreads as the index moves against the position. We remain in the position with an opportunity to close for a gain for the month.
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The markets traded sideways all morning and then slowly lost steam in the afternoon. Buying in the last hour of trading recovered much of the earlier losses. SPX closed at $1328, down $5. Unlike the past several sessions, RUT fared worse than SPX, losing $9 to close at $841. The absence of economic data or earnings announcements seemed to leave traders without much incentive to trade. Trading volume matched recent lows with 2.7 billion shares of the S&P 500 trading today. Trading volume dropped 8% on the NYSE and dropped 9% on NASDAQ.
The pull back in RUT took much of the pressure off of my May iron condor but I am waiting until Monday to see if it makes sense to remove my hedges. I have been burned before removing hedges too quickly. Small losses on hedge options are like the insurance premiums on your house. Even if my house didn't burn down, I don't feel badly having paid the insurance premium. The P/L stands at -$1,650 with delta = +$15 and theta = +$56. So our price risk is minimized and yet theta is still reasonably large.
Have a great weekend.
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The markets appear to be a nearly balanced tug of war these days between the bulls and the bears. The bulls seem to have the edge, but just barely. As oil nearly hit $109/bbl and gold hit a new high at $1467, the markets oscillated sideways and slightly higher. SPX closed up $3 at $1336 while RUT set a new 52 week high at $854, up $1. But SPX has yet to break through its high of $1343 set in February. In fact, the last three trading sessions on SPX have displayed various versions of the doji candlestick - the classic sign of indecision; neither the bulls nor the bears can quite take control.Trading volume continues at fairly muted levels. 3.1 billion shares of the SPX traded today, up a bit from yesterday but still below the 50 dma. Trading volume rose 4% on the NYSE and was up 3% on NASDAQ.
My May iron condor on RUT is cruising along pretty much unchanged with a P/L of -$1,401 and delta = -$2 and theta = +$37. Our adjustments are holding our losses to a reasonable level while we give the market some time to trade sideways or even pull back a bit. The delta of our $890 calls dropped to 26. At times in the market like these, I appreciate my delta neutral positions; I don't find myself worrying about them as much as my directional trades. Unemployment claims will report tomorrow; we'll see if that tips the scale one way or the other.
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The new Japanese earthquakes sent some fear through the markets today. Although the markets opened reasonably positively, they never recovered from this news. SPX closed down $2 at $1336 and RUT closed at $849, down $5. Trading volume was flat to down with 3.1 billion shares of the S&P 500 trading. The NYSE saw trading volume increase slightly by 2% but volume dropped on NASDAQ by 11%. Initial unemployment claims were essentially flat once again at 382k, down 10k. Continuing unemployment claims came in at 3.7 million, down nine thousand.
One has to be impressed by the resilience of this market; the bears seem unable to get anything going to the downside regardless of the news or economic data. But similarly, the bulls are having difficulty hitting new highs and firmly resuming the bullish uptrend. The only exception has been the Russell 2000 Index (RUT); some analysts believe traders are seeking safety from global unrest in domestic mid-cap stocks and driving this index higher. RUT has set six new 52 week highs over the past seven sessions.
My May condor on RUT is essentially unchanged with a P/L at -$1,630 with position delta = +$6 and theta = +$54. If we were to close our call hedges today, we would have about $2,300 in potential gains remaining in this position. That is the power of this type of hedging adjustment; if the market slows or pulls back, we can salvage a large portion of our position's profits. But if the market doesn't pull back, we have minimized our losses. Delta neutral trading isn't feasible without these adjustment techniques.
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The markets traded up this morning, but turned over about 1 pm ET and headed south. SPX closed unchanged at $1333, but RUT continues to set new highs with a $4 gain today to close at $853. Trading volume was mixed. Only 2.6 billion shares of the S&P 500 traded, up slightly from yesterday but well under the 50 dma at 3.4B. Trading volume was up 8% on the NYSE and also up 15% on NASDAQ. The only economic data reported today was the ISM Services Index for March at 57.3, down from last month's 59.7. The minutes from the last FOMC meeting came out today, but didn't seem to have much impact on the market (the broad decline began about an hour before the release of the minutes).
AAPL slid in early trading because its weight in the NASDAQ 100 Index (NDX) is being reduced in the latest rebalancing, but it recovered most of the decline before the close. GOOG took it on the chin due to rumors of an upcoming FTC investigation.
Given RUT's steady rise, I decided to apply additional adjustments today to the May iron condor on RUT. I rolled some of my 890/900 call spreads up to 920/930. This improved the Greeks of the position markedly with position delta = +$4 and theta = +$45. Many iron condor traders use the position delta as the trigger for their adjustments. For example, if your position delta = -$100 and RUT runs up $6 tomorrow, that will translate into a loss of $600 on the position, assuming other factors are constant, which they aren't. But it gives us an idea of our position's risk due to price movement. My objective with the adjustments is to keep delta at levels consistent with my risk tolerance while theta remains large and positive.
I wonder what surprises this market will bring tomorrow? It is interesting that RUT is setting new highs every day and SPX has yet to break the highs it set back in February. Many technical traders are starting to worry that a classic double top is being formed by SPX (a bearish reversal). But this market has proven difficult to predict.
