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The markets traded up from the open this morning, but after about two hours, they turned downward and didn't look back. The SPX closed at $1074 after dropping almost $11 today. The S&P 500 is now down almost 7% since its 52 week high earlier this month. RUT closed at $602, a drop of almost $6; RUT is down a little over 7% since its 52 week high a couple of weeks ago. The major indexes had their worst monthly decline since February of 2009. All of this market carnage occurred in the face of a better than expected fourth quarter GDP report of an annualized rate of 5.7% (the street expected 4.7%). Some of the CNBC talking heads cite worries about European financial problems; the dollar traded higher, at least in part due to relative strength to the Euro.
My Feb RUT iron condor now stands almost perfectly centered at plus or minus one standard deviation with a P/L of +$1,660, delta = +$21 and theta = +$162. You can see the theta starting to build now that we are down to 20 days to expiration. The drop in RUT late today pushed my Mar RUT iron condor to the edge of adjustment; if RUT doesn't rally Monday, I will be adjusting this position. It now stands at near breakeven, delta = +$31 and theta = +$72. There is a good lesson here. We have had a significant correction this month, but neither of our condors are bleeding red ink. That is because we didn't just sit and hope it would turn around. The iron condor will eat your lunch if you don't actively manage the position.
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Today's markets opened weak and traded down pretty severely until late morning; the rest of the day was choppy but generally up. A negative note was a sell-off in the last half hour. This often shows pessimism on the part of traders not wanting to hold much of a position overnight. As always in this situation, everyone has their explanation; often it is simply rationalization after the fact - it makes us humans think we are in control. Anyway, the increase in unemployment claims this morning certainly didn't help the dour mood; and the market is still concerned about Bernanke's reappointment. That is simply a case of "the devil you know". The street hates uncertainty. The S&P 500 dropped almost $13 to close at $1085. That is significant because that was the support level held during much of November and December. RUT lost over $10 to close at $608. Again, during most of November and December, RUT hovered in the $605 - $610 range.
My positions were sitting on the edge going into today's market so I wasted no time making some adjustments this morning. That was fortunate because it just got uglier. I closed the 20 contracts of the Feb 690/700 calls for $0.10 and opened 20 contracts of the 640/650 calls for $1.21. That balanced out the Feb iron condor nicely; now both spreads are approximately one standard deviation OTM with a net gain of +$1,160, delta =-$82 and theta = +$198. I modeled buying one or two Mar $570 puts but it killed my theta too much; rolling down the calls worked much better. I have boosted my theta sufficiently that I can buy a long hedge put later if necessary.
I made a similar adjustment to my March RUT iron condor; I closed ten contracts of the 690/700 calls for $0.38 and rolled down to 670/680 for $0.80. That brought the position to a net gain of $540, delta = +$10 and theta = +$72. So now we go back to the game of guessing how much of a correction is enough. But remember; that's a side game for amusement. Playing delta neutral positions relieves you from predicting - you just play what the market gives you.
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A few weeks ago, it was common to see the market trade downward, but see the buyers come in late in the day and take control to push it back up. Now we are seeing the sellers seizing every opportunity to take their profits. Today's markets opened lower but were buoyed by a positive consumer confidence report for January this morning. This led a surge in the stock markets and boosted the S&P 500 to above its strong resistance level at $1100. But the selling began around 2 pm and continued throughout the remainder of the trading day. The SPX lost almost $5 to close at $1092 while the RUT closed at $612, down $6. Good earnings reports have generally been met with profit taking with the exception of AAPL, which is trading strongly after its excellent earnings report last evening.
My Feb RUT iron condor stands at a P/L of +$1,500, delta = +$64 and theta = +$77. The delta of the short 570 puts is 16. Both this delta and the theta/delta ratio near 1:1 tell us we are near a possible adjustment if the RUT drops much more.
My Mar RUT iron condor is roughly at breakeven with a P/L of +$100, delta = +$11 and theta = +$70. It is interesting to note that the delta of the short 570 puts is 24. But I have not required an adjustment to this position because adding the 670/680 call spreads balanced out the overall position delta. So our downside price risk is minimal. The risk/reward chart shows that this position will have a maximum loss of the order of $1000 or less down to RUT = $595 or so. When you have the standard iron condor configuration, watching the short option delta is a good adjustment trigger, but when you have mixed some of the spread positions, you must primarily watch your overall position delta and the theta/delta ratio.
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The first FOMC statement of the year caused a lot of choppy trading this afternoon, but the trading turned consistently bullish for the last hour, enabling some modest gains on the major indexes. The mixed reaction to the FOMC statement probably had to do with the fact that while interest rates will remain low, one fed governor voted against that policy. RUT closed at $618, up over $6 while the SPX gained a little over $5 to close at $1098. The $1100 resistance level that proved to be a significant barrier through most of November and December is now holding firm once again. RUT appears to have bounced off the support level at $610 set back in mid December before the markets broke out to new highs. The next strong resistance level for RUT is around $625.
Today's modest move upward was helpful for my iron condors. The Feb position now stands at a P/L of +$2,040, delta = +$46 and theta = +$86. The Mar condor has broken into the black with a gain of $610, delta = -$5 and theta = +$75.
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The markets opened up strong this morning but the existing home sales report at 10 am this morning sent the markets downward (Dec sales down 17%). The markets recovered from that through the balance of the day, but selling during the last hour of trading erased many of the gains. The SPX rose $5 to close at $1097 while the RUT was nearly unchanged at $518. The VIX pulled back to 25%. Trading volume was generally below recent averages, so the market's participants do not appear to be fully convicted in either direction.
Friday left my condors in need of some adjustment and initially this morning it appeared that might not be necessary. But later in the morning, I decided to make some changes. I left the Feb RUT iron condors as they were because the overall delta of the position was not really out too far. That position now stands at a net profit of $1,700, delta = +$46, and theta = +$73. The delta of the Feb $570 puts is now just under 16 - not too bad, but still close to my adjustment trigger. I considered several different adjustments to the Mar RUT iron condor but settled on adding ten more contracts of the 560/570 puts at $1.75 and ten more call spreads at 670/680 for $1.45. Thus, my Mar condor now consists of ten 690/700 calls, and ten 670/680 calls, and twenty 560/570 put spreads with a total P/L of -$20, delta = -$14 and theta = +$57. The balance of the week is loaded with economic reports and earnings announcements, so it is unlikely this market is just going to trade sideways. If you are unable to watch the market throughout the day, you might consider moving up your stop losses to be even more conservative given the recent volatility.
