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News of increased unemployment claims this morning (up 31k) plus the largest gain in the PPI since October 2008 (1.4%) had the market concerned about inflation and a possible raise in rates by the Fed in response. But positive news came with the Philadelphia Federal Reserve manufacturing index up in February by 15%. The market traded pretty much sideways through most of the day with the SPX and RUT both right at strong resistance levels. But the afternoon trading inched up and resulted in both the SPX and RUT closing above resistance, but not strongly and on reduced trading volume - so is it really a break out or will it pull back in the next few days? RUT closed at $629, up over $4, and somewhat above its resistance level at $625. SPX closed above the $1100 resistance level at $1107, a gain of a little over $7.
Even though a case could be made for the markets stalling here in this area of strong resistance, I decided my March iron condor was too close to the edge. I closed the 20 contracts of the $640/650 calls for $3.40 and rolled up to 660/670 for a credit of $1.23. I also closed the 20 contracts of 520/530 puts for $0.22 and rolled up to 570/580 for $0.80. I left the April $640 calls on (now up by $1200) until I am sure this upward move has ended or at least slowed. This brings my Mar condor to a P/L of - $2,050, delta = +$16 and theta = +104. The profit potential for this trade is now reduced to about $2300 - not great, but still in the game. This has been a crazy month! RUT was trading at $636 when we opened this trade, dropped 9% to $580 and then rose 8% to today's close at 629. These are the unusual months that your trading strategies must be able to survive for trading the condor long term to be feasible.
On a more positive note, today's close for RUT at $629 makes it reasonably certain that our Feb 540/550 put spreads will expire worthless (RUT settles in the morning); you may recall we closed the calls last Friday, so our Feb iron condor gained $2,794 or 17% on capital at risk. Next week, we will start to look at entering our April condor.
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Yesterday's strong move in the markets left RUT and SPX right up against strong resistance levels; they failed to break through today. In the case of RUT, the $625 level was set by the double top back in September and October of last year. The S&P 500 is facing the $1100 resistance level it found so difficult to break through late last year. RUT closed today just below the $625 mark, up less than $4. Similarly, SPX rose almost $5 but closed just a few cents shy of $1100. Housing reports this morning were mixed with housing starts up in Jan over Dec but building permits were down in January. This afternoon, the FOMC released the minutes from their last meeting; that insight into the FOMC discussions didn't seem to have much effect on the stock markets but it did help strengthen the dollar. Today's modest strength in the stock market was surprising in light of the dollar's trade upward today.
My Mar iron condor has been pushed far enough to have rolled both call and put spreads upward and now we have our long April calls in place as a hedge against continued a continued upward move. But that hedge is running out of steam. Our position P/L is now at -$1,150 with delta = -$106 and theta = +$78. The fact that delta now exceeds theta underscores the weakness of my position. I am watching this position very closely at this point; I won't allow the loss to exceed about $2,000 before I close and roll the call spreads. If RUT and/or SPX break through resistance, I will immediately close the call spreads.
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A strong dollar and a disappointing consumer sentiment survey started the markets off this morning with losses. But, as the day wore on, the dollar gave back much of its gains and the market recovered most of its losses. The small and mid-caps outperformed the broad indexes today with RUT increasing over $5 to close at $611 while the SPX dropped almost $3 to close at $1076. Trading volume was up about 5% on the NYSE. Increased trading volume and strength among small and mid-cap stocks are bullish signs.
Today was a decision point for my Feb iron condors. The 640/650 calls were 1.8 standard deviations OTM, while the 540/550 puts were over three standard deviations OTM. So I closed the call spreads for $0.15. This leaves the position at a gain of $2,594. Presuming the put spreads expire worthless, we will be up $2,794 or 17% on our February iron condor.
At one point this morning, I almost removed the April put hedges on my Mar condors, but then the market strengthened. My Mar iron condor now stands at a P/L of -$890, delta = -$72 and theta = +$90. I almost bought one more April call hedge, but decided to hold off until Tuesday. That extra call would have cut delta in half but also reduced theta to about $74.
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The Empire Manufacturing Index blew estimates out of the water first thing this morning, fueling the market. But the dollar had one of its worst days since November and the dollar is still strongly tied to the stock markets in inverse fashion. RUT closed up over $10 at $621 while the SPX ran up over $19 to close at $1095. RUT has a strong resistance level at about $625 and SPX is back within reach of its strong $1100 resistance.
My Mar iron condor stands at a net loss of $830, with a position delta of -$87 and theta = +$83. Our $640 calls now have a delta of 29; that plus the fact that our delta and theta values are close to one to one show the weakness of our position. I modeled adding one more long hedge and found that delta would increase to -$51, but theta would decrease to $65. So we are nearing the limits of our adjustment. If this bullish trend continues tomorrow, I may be forced to close and roll call spreads to keep this position out of trouble.
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Trading continued to follow the dollar in inverse fashion. The dollar was trading with gains relative to other currencies this morning and the market fell; then the dollar weakened and the markets took off. RUT closed up almost $10 at $605 while the SPX rose over $10 to close at $1078. Initial unemployment claims were better than expected this morning, but the dollar trade overwhelmed that news.
My Feb condors are doing very well at this point. The 540/550 put spreads are now over two standard deviations OTM and the 640/650 call spreads are more like 1.5 standard deviations OTM. The position stands at a gain of $2,614 with a position delta of -$2 and theta = +$136 - hard to be more delta neutral than that.
The Mar condor is being squeezed by today's upward move. The delta of the 640 calls hit 19 this afternoon, so I purchased two April $640 calls for $9.00. This position closed near breakeven with a delta of -$31 and theta = +$88. Without the adjustment, the position delta would have been -$87 and theta would be +$118. So our adjustment cut delta in half and reduced theta, but not terribly. If the market continues upward, I will be doing some "what if" analysis around adding one more long Apr call or simply closing and rolling the call spreads.
