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The market's indecision we observed yesterday continued with sideways, choppy trading. Some late session buying pushed the RUT and SPX into positive territory during the last hour of trading, but barely positive. RUT closed at $571 and the SPX closed at $1045. The broader market appears to lack clear direction; a large number of companies are reporting earnings this evening; that may push the market one way or the other for tomorrow's open.
I still have the Jan $510 puts hedging my Dec iron condor. The Dec $510 puts have edged their delta back down to 19. This position is right at the tipping point. If RUT moves up from here, I will start to lose money on the hedge and will need to close it. However, a downward move in RUT will only result in very nominal losses due to the protection of the hedge position. The overall position stands at a P/L of +$70, delta = -$57 and theta = +$50. The beauty of a long hedge in the following month is that it provides strong delta protection but with minimal negative impact on our position theta.This gives you the patience to calmly watch the market and give it a chance to turn back upward or trade sideways from here; then you have salvaged a position that might have been closed otherwise. In the meantime, we simply trade our system in response to the market's moves - there is no need to predict the market's moves.
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The markets opened this morning in positive territory, buoyed by some good economic and manufacturing reports. But that didn't last long and then the selling pulled the market down through most of the day before buyers came in and returned the major indexes closer to where they started the day. RUT ran up to about $570 and then down to $553 before closing almost unchanged at $562. The SPX closed up about $7 at $1043. And all of this occurred in better than average trading volume. That tells me there is significant indecision in this market; neither the buyers nor the sellers dominated with conviction. But given the volatility of this market, that is likely to change tomorrow.
During the weakness this morning, I decided to roll my Dec 660/670 call spreads down to 630/640. I closed the 660/670 calls for $0.40, netting a gain of $1,100 (20 contracts). I opened 20 contracts of the 630/640 calls at about one standard deviation OTM for $1.20. This left my Dec iron condor on RUT at a P/L of $180, delta = -$50 and theta = +$43. I still have the two Jan $510 puts hedging the downside.
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This market's huge up day after such a sell-off yesterday has me thinking of poor exasperated Charlie Brown. The consensus explanation is that the market was surprised by the better than expected 3.5% GDP growth for the third quarter, but I don't think anyone really understands this market. What this volatility really shows is the general level of anxiety among traders; it takes very little to start either a bullish run upward or a panic for the exits. The lesson for us mice to avoid being squashed by the elephant stampede is old fashioned risk management: have a plan; follow your plan; and always have stop loss orders in place.
RUT ran up almost $14 to close at $580 while the SPX ran almost $23 to close at $1066. The SPX move was particularly strong and broad based across industry groups, which is why I decided to remove my hedge position on the Dec condors. But I certainly don't believe we are out of the woods yet. This is a scary market (and Halloween is coming!).
I sold the two Jan $510 puts I purchased yesterday to hedge my Dec iron condor for $11.50 (loss of $260) when the deltas of my short Dec $510 puts returned to 16. This left the P/L at +$200, delta = +$7 and theta = +$63. Make sure your stops are in place and be especially disciplined in this market.
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Yesterday's up day was apparently just a head-fake. The Chicago PMI and the consumer sentiment reports both beat expectations, but that wasn't enough for this market - the sellers went on a rampage. It reminds me of a few weeks ago when the bad news was ignored and the market continued to rally. RUT dropped over $17 to close at $563 while the SPX dropped almost $30 to close at $1036. The next area of support for RUT is around $548-$552 while support for SPX is around $1020.
I re-established my Jan $510 put hedge this morning (two contracts at $12.70). This left my Dec iron condor at the close with a P/L of -$20, delta = -$18 and theta = +$20. The adjustment puts gained over $500 today, minimizing the loss on my condor and also flattening the risk/reward curve down to about $520. This gives the market time to turn around or for us to further adjust or close our position without getting ourselves into a large loss.
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Today's market certainly answered our questions about consolidation versus correction. The S&P 500 broke through its 50 day moving average, closing at $1043, down over $20 on the day. RUT broke support at $576 and closed at $566, down almost $21 on the day. RUT's break through $576 confirmed the double top pattern we commented on yesterday. Investor's Business Daily (IBD) declared a "market in correction" yesterday and today's action made it abundantly clear to everyone. By the way, I highly recommend IBD's "The Big Picture"; they do an excellent job of tracking the overall market trend.
As the market opened up this morning in negative territory, I closed my Nov 520/530 put spreads for $0.90 (20 contracts). This leaves my Nov iron condor with 20 contracts of the 680/690 calls that are almost three standard deviations OTM. I will monitor them, but most likely will allow them to expire worthless. If that is the case, my Nov iron condor will have gained $2,060 or 13% on capital at risk.
Later in the morning, as the market carnage continued, I bought two contracts of the Jan $510 puts for $12.80 to hedge my Dec 500/510 put spreads. This is somewhat ironic since I just established that condor yesterday. This left my Dec condor at the close with a P/L of zero, delta = -$29 and theta = +$29. These weak Greeks illustrate how vulnerable the iron condor is to early moves against the position.
Allow me to make one other observation about today's activities in the market: as I was looking at my Nov condors this morning when the market opened down, I had a tempting voice in my head trying to convince me to wait and give it some time to turn around - "don't close those put spreads at a loss; maybe we can get out even later today or tomorrow". Later in the day, I was tempted not to buy the hedge for my Dec condor because I had just put that position on yesterday. But my short puts had already crossed delta = 17, so I bought the Jan puts. Develop your system and then follow your rules. It sounds simple, but anything involving our emotions is rarely straightforward.
