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When Thomas Paine said, "These are the times that try men's souls", he wasn't thinking about markets, but that is certainly an appropriate quote for delta neutral traders over the past 18 months. Only two days ago, the markets took off with a roar and ran over everything in their way. Today they gave back much of those gains. Google's earnings announcement unnerved some investors with concern over future investments and Eric Schmidt's absence on the conference call. Based on that alone, I expected some softness this morning. But then the SEC charged Goldman Sachs with fraud and the market collapsed; everyone was running to lock in the profits from this incredible run-up of the past 45 days. RUT dropped nearly $10 to close at $715 while the SPX closed at $1192, down nearly $20. Trading volume is always higher than average on expiration Friday but today's trading was off the charts. The S&P 500 traded over seven billion shares today!
Ironically, I adjusted my May condor on RUT yesterday by rolling half of my 750/760 calls to 770/780 and closing all of my 590/600 puts and rolling them to 650/660. I left my June $750 calls in place as a hedge against a continued move upward. Imagine my surprise today. But it is better to have adjusted early than too late. The position greeks are solid with delta = +$13 and theta = +$82. The risk/reward chart suggests the P/L for this position will be essentially unchanged up to around $730 on RUT, so it is well hedged for a continued move upward. But do I need a hedge for the upside? The RUT hit a low of $710 today and then traders came to the table and bid it back up, so I think the basic bullish case for the market is intact. Bulls are still buying the pullbacks.
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The markets slowed to catch their breath after yesterday's huge run; trading was choppy but mostly sideways. Trading volume was flat to increased with volume on the NYSE up 3% but down 9% on NASDAQ. But the S&P 500 traded at over 5 billion shares, even more than yesterday's big increase. Greece's financial difficulties are still on traders' minds; today's economic news was mixed with the Empire State Manufacturing survey hitting a five month high but industrial production only increased 0.1%, less than expected. Initial unemployment claims increased to 484k from 460k and continuing claims increased by 30k to 4.6 million. It seems as though most economic measures are flattening or improving, but jobs aren't being created yet. A combination of some disappointing economic news together with consolidation from yesterday's upward run led to a mostly sideways day in the markets. RUT closed up $2 at $724 and the SPX closed nearly unchanged at $1212. The bullish case is still very much alive; all dips are being bought.
I made further adjustments and repositioned my May RUT iron condor to shift its greeks into better position: now delta stands at -$1 and theta = +$81. The underlying strength of this market is remarkable; it is just bulldozing right through all of the overbought technical indicators. So I decided to aggressively reposition my May condor to a delta neutral stance with 35 days to go.
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Alcoa's earnings report disappointed many traders last night and reinforced the fears of some that the economic recovery is fragile at best. But by mid-morning, the market started recovering its losses and closed the day with modest gains. RUT closed up $2 at $707 while the SPX gained $1 to close at $1197. Trading volume was up significantly across the board with an 11% increase on the NYSE, a 24% increase on NASDAQ and trading on the S&P 500 rose back up to hit its 50 day moving average. Today's market action demonstrates the underlying bullish strength of this market when the bears take the market down and the bulls can bring it all the way back in the same session. Today's market rise was partially in anticipation of an expected positive earnings report from Intel after the close (earnings were up significantly and INTC is up about $1 in after market trading). JP Morgan Chase reports tomorrow morning before the open and the CPI reports will be out in the morning; the Fed's beige book comes out tomorrow afternoon. All of these news events are potentially market moving, but it is hard to predict the direction.
My April RUT iron condor is limping into the final lap with a P/L of -$849, delta = -$237 and theta = +$727. With such a large position theta, each day makes a large difference in this position's P/L. The double calendar I added to this position isn't helping much at this point, with RUT's IV down a couple of points and RUT at the upper breakeven for the double calendar. The May condor stands at a P/L of +$600, delta = -$77 and theta = +$85.
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Intel's earnings announcement set the bulls on a rampage today, closing all major indexes at new 52 week highs. RUT ran over $14 to close at $721. SPX closed at a new high of $1,211 with an increase of over $13. The Fed's Beige Book kept the rally going this afternoon with its observations of increased economic activity across a broad spectrum of the economy. Intel's move led an increase in trading volume on NASDAQ of 20%; NYSE increased 8% while the S&P 500 trading volume surged to nearly five billion shares, well above its 50 day moving average at under four billion shares.
Today's increase in the Russell 2000 Index (RUT) represented a 1.5 standard deviation move - a huge move for one day. My weak April condor position was destroyed by this move. I closed the double calendar for a $910 loss and then closed the 720/730 call spreads; ironically, I could have closed those calls yesterday for a small debit on the order of $0.10 - $0.20. Assuming that the 630/640 put spreads expire worthless, the April iron condor closes with a $3,745 loss. Ouch! Now you see why options coaches and teachers don't trade in public.
Our May RUT iron condor required an initial adjustment today, but will require major adjustments soon if this upward momentum continues.
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Slow trading with modest gains characterized today's session; trading volume remained flat to lower. Traders remain wary of global debit issues, persistent high unemployment, and many overbought technical indicators - but the market just keeps grinding out more advances. Earnings reports begin this week and traders will be watching them closely for clues. But it is difficult to predict the market's response; good reports may encourage more buying or it could trigger a round of profit taking. However, weak business results and pessimistic forecasts could begin a pullback. The market has been nearly balanced now for several weeks; it is hard to predict what news may trigger a move. The CPI report Wednesday will be scrutinized for signs of inflation; but that would be a surprise at this point. I just took a quick look at Alcoa's earnings report - doesn't look like good news to me. But maybe the market will be happy with "slightly better".
My April iron condor stands at a P/L of -$979, delta = -$240 and theta = +$600 and May stands at a P/L of +$400, delta = -$81 and theta = +$90. I will be closing the embedded double calendar in the April position Wednesday or Thursday.
