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It appears that many traders began to take the Fed's assessment of the economy much more pessimistically after thinking about it overnight. The market sold off at the open and traded even lower as the day progressed. China's reports of weaker industrial production in July probably didn't help the situation. Talk of a double dip has once again taken the front row in traders' worries. RUT traded down $26 to close at $620 while the SPX closed down $32 at $1089, the 50 day moving average (dma). This move occurred on higher volume, with the S&P 500 stocks trading 4 billion shares, right at the 50 dma. Trading volume on the NYSE was up 15% and trading on the NASDAQ increased 11%.
In volatile markets like we have been experiencing, one's condor position can change overnight; yesterday, the Aug position appeared to be well positioned; today I bought one Aug $630 put for $17.45 to hedge this downside move; this brings the position to a P/L of -$1712, delta = +$31 and theta = +112. My Sept condor stands at P/L = +$980 with delta = +$58 and theta = +$19. The Aug position has now required six hedge adjustments plus four rolls of spreads up and down - what a volatile market! More importantly, we are still "in the game" with a shot at breaking even or perhaps even a small profit. Which way will the roller coaster run tomorrow?
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The drop of 0.9% in nonfarm productivity levels surprised the market this morning and caused a sell-off on higher volume. RUT dropped back to its 200 dma before bouncing to close at $646, down $13 on the day. SPX fell through its 200 dma but recovered to close at $1121, down $7 on the day. The FOMC announcement appeared to buoy the market a bit, but it was short lived. As expected, interest rates were unchanged but some of the Fed's language concerning the economy was sobering, confirming signs of very slow economic recovery and not giving a lot of hope for anything to change soon. As has been typical lately, the trading volume bounced up on the sell-off, increasing to 3.5 billion shares of the S&P 500 stocks, up 29% on the NYSE, and up 26% on NASDAQ.
My Aug iron condor on RUT was helped by this sell-off, now standing at a delta of -$27 and theta = +$265, while the Sept condor has a delta of +$14 and theta = +$55. RUT appears to be building strong support at its 200 dma at $642 while the SPX appears to have strong support in the range of $1100 to $1115. This pattern together with the weak volume on advances, suggests the risk to our condors is to the upside, not the downside. But, the key is to play what the market gives us, not what we predict. For now, both of my condors are well positioned.
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The jobs reports brought the sellers into the market this morning, driving the major indexes significantly lower; however, most of those losses were recovered during the last hour of trading. RUT traded down to its 50 dma at $640 before bouncing up to close at $651, a loss of $4 on the day. SPX broke through its 200 dma at 1115 and then recovered to close at $1122, for a loss of $4.
Over 131k jobs were lost in July and the unemployment rate remained unchanged at 9.5%. Although this job loss number was smaller than last month, it was still a loss. The average work week remained essentially unchanged at 34.2 hours (it was 34.1 hours last month). Normally, one expects to see work week hours increase before hiring resumes.
Trading volume was modestly higher with a 9% increase on the NYSE and a 5% increase on NASDAQ. The S&P 500 stocks traded at 3.2 billion shares, up modestly from yesterday but still under the 50 dma. So our sideways to upward trend on modest volume continues. Economic data has been proving very uninspiring and this doesn't give the bulls the momentum they need to sustain a rally. But the data are not bad enough to fuel a case for the bears so dips in the market are seen as bargains - today's action was an excellent example. So, this sideways action is likely to continue until the economic data can build either a bullish or a bearish case.
I removed the call hedge this morning on my Aug condor, which now stands at a P/L of -$1,682 with position delta = -$61 and position theta = +$220. Now that we are under two weeks to expiration, theta is ramping up on this position. The Sept iron condor on RUT stands at a P/L of +$740, with delta = +$1 and theta = +$74.
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Markets traded up today, but again, the underlying volume wasn't strong. Advances on weak volume have become the standard for this market. RUT increased $9 to close at $660 while the SPX ran up $6 and closed at $1128. Trading volume declined 20% on the NYSE and declined 17% on NASDAQ. The S&P 500 stocks traded 2.8 billion shares, well below the 50 dma of 4 billion shares. One possible explanation for today's lower volume may have been rooted in traders looking forward to the FOMC announcement tomorrow. But in general, I think the recent low volume patterns of trading reflect traders' lack of conviction concerning the economic recovery.
The call spreads of my Aug iron condor remain uncomfortably close to the index. The short $680 calls have a delta of 23; time is helping since we now only have ten days to expiration. The delta of this position is now -$108, which underscores the price risk of further increases in RUT. Theta is now at +$255, so the theta/delta ratio is still strong. My Sept RUT iron condor at 530/540 and 740/750 is well balanced with a delta of -$13 and theta = +$62.
So now we look forward to the FOMC announcement tomorrow, although it doesn't appear that we can expect any news of much significance. Traders will be examining the statement closely for clues about future economic prospects, but I don't expect much of an effect on the market.
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Traders were disappointed with the unemployment claims data this morning and traded sideways to downward all day. Initial unemployment claims rose by 19k to 479k while the number of continuing claims dropped by 34k to 4.537 million. These were modest changes but traders were looking for some stronger signs of recovery. Now all eyes focus on tomorrow morning's jobs report with the widely followed unemployment rate (officially the Nonfarms Payroll Report).
RUT closed down $8 at $655 while the SPX closed nearly unchanged at $1126, down $1. But trading volume fell once again across the board with a 10% drop on the NYSE and a 12% drop on NASDAQ. Trading in the S&P 5000 stocks declined to 2.8 billion shares; this has declined steadily from about 5.5 billion shares per day at the end of July. This sideways action on lower volume feels like a spring coiled and ready to break out one way or the other. That is why I chose to add an ATM call to my Aug condor yesterday; I lost money on it today but I am still worried about a surprise in the jobs report sending this market higher and a portion of my call spreads are too close at 680/690. Another reason I am concerned about protecting the up side is the price action on SPX. For three days now we have been building support at $1120; today SPX traded down to just below $1120 and then bounced to close virtually unchanged. That pattern suggests the likelihood of a breakout upward.
The Greeks on my Aug condor look good at a delta value of -$38 and theta = +$179, a very strong ratio. But at this point, this condor is looking more and more like a breakeven trade. By contrast, initiating the Sept condor just in time for this sideways trading pattern has that position off to the races with a P/L of +$1,000, delta = -$14 and theta = +$59.
I have been invited to speak at the Traders Expo in Las Vegas Nov 17-20. If you are planning to be there, let me know so we can get together. The detailed agenda isn't available as yet, but you can register free of charge and receive updates. And rooms in Las Vegas are much less expensive these days! You can stay at the Bellagio for as little as $104 per night!
