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The market opened strongly this morning, buoyed by a better than expected home price report, but 10 am brought a disappointing consumer confidence report and that threw cold water on the trading for the balance of the day. However, the good news is that the market found support rather easily and didn't give up any significant losses. So the underlying bullish trend appears intact. RUT closed down about $3 to $610 and the SPX closed down about $2 to close at $1061.
This sideways market action is great for my iron condors and they are almost unchanged from yesterday: my Oct condor stands at a P/L of -$680, delta = -$19 and theta = +$125; both short options are greater than one standard deviation OTM. The Nov condor stands at a P/L of -$140, delta = -$43 and theta = +$78. The short $680 call now stands just inside one standard deviation with a delta of 13. This trade still has 51 days until expiration so we cannot tolerate much of an upward move in RUT over the next week, or we will have to adjust our call spread position.
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The markets traded up strongly this morning and then held pretty steady throughout the day. Financials and technology led the charge early and the financials ended the day up over 2.8%. However, trading volume was low due to Yom Kippur. Tomorrow brings the potential for higher trading volume, the consumer confidence report and the housing price index data. We'll see if that data dampens any of the merger euphoria that drove today's markets. A strong day like today on greater than average trading volume would be very bullish.
RUT closed at $613 and the SPX closed at $1063. My Oct condor stands at -$870, delta = -$23 and theta = +$129. The short $660 calls are now well outside of one standard deviation at $651. That is comforting but these feelings of confidence can be fleeting. My Nov condor stands at a P/L of -$240, delta = -$40 and theta = +$77. The delta of the $680 call is up to 14, nearing our adjustment zone. So for now, we just watch and wait.
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The sellers returned to the markets this morning and spurned the good news of lower initial unemployment claims and lower continuing unemployment claims. However, the decline in existing home sales took the market by surprise and that may have accelerated profit taking. RUT dropped about $12 to $602 and the SPX dropped about $10 to $1050; both indexes are well above their nearest support levels, so I think the bullish bias to this market continues. All of the major indexes traded down all morning, but then strengthened a bit in the last hour of trading.
I established the call spreads for my Nov iron condor this morning as the market was dropping, selling 20 contracts of the Nov 680/690 calls for $0.86. I then watched to see if the buyers would come back into the market, and when that happened late in the day, I sold 20 contracts of the 500/510 puts for $0.87. The range for plus or minus one standard deviation was $538 to $664. My resulting position is somewhat bearish with a delta = -$21 and +$75 in theta. IV is skewed with a value of about 39% for my 500/510 puts versus about 24% for the 680/690 calls. If I had placed my put spreads closer to one standard deviation OTM, my short puts would have been starting out with pretty high deltas around 15-16, meaning I would be adjusting the position with only a small move downward in RUT tomorrow. Thus, I ended up with a bearish leaning condor even though I ideally wanted it to be delta neutral.
In the meantime, this downward move of the past couple of days has positioned my Oct condor nearly delta neutral at +$15 with a large positive theta of $106. However, this position is still well underwater at about -$1,200 because our adjustments have reduced our profit potential and we need a lot of time decay to get us into the black.
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Today was another dismal day in the markets, but the losses were relatively minor. RUT closed at $599, down about $3; SPX closed at $1044, down about $6. RUT was down as far as $596 before afternoon buying pared some of the losses. Let's consider RUT as we look at the "correction or consolidation" question (the same analysis holds for the S&P 500). If RUT were to drop back to its closest support level at about $585, that would represent a 6% drop from recent highs. Most market observers would say a 10% drop constitutes a correction. Of course, this isn't a science - maybe 6% will constitute the correction this time. But the conclusion is clear: so far, we have some minor consolidation going on, nothing too alarming. Next week is loaded with economic reports: consumer confidence, ADP payroll, final Q2 GDP, Chicago PMI, etc. Assuming no huge surprises in any of those reports, we will probably just muddle along here for a while.
My Oct condor now stands at P/L of -$1,100, delta = +$20 and theta = +102 (great theta/delta ratio, but unfortunately, this trade is badly wounded as it limps home). Our Nov condor is barely out of the gate but is in good shape so far with P/L of +$20, delta = -$13, and theta = +$68. The trades I publish here in my blog are in one $50k account, and it is worth noting that you can also manage a larger account containing several trades with the Greeks just as we have with these individual condors. This overall account stands at a P/L of -$685, delta = +$17, and theta = +$147. So we come to the same conclusion either way we look at the trades - everything is fine; no adjustments are necessary. We are just watching the time decay.
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The markets were buoyed by the FOMC announcement this afternoon. The Fed reiterated its observations that economic activity has improved, but, perhaps more importantly, said they intend to leave the fed funds rate at very low levels for some extended period of time to stimulate the economy. That boosted the markets. But it didn't last long before profit taking ensued. However, look at the charts. Both RUT and SPX simply closed down at the bottom of the consolidating range of the past few sessions. Therefore, there is no sign of a correction or change in trend direction here as yet.
This sideways and now slightly downward trading has been helpful for my Oct iron condor. The delta of my short $660 calls had dropped back to 14 this morning (closed at 12), so I sold my Nov $640 call for $16.10 ($450 gain). The position now stands at a P/L of -$1,385, delta = -$40 and theta = +$115. Our theta/delta ratio is back to a healthy neighborhood, but our wounded condor only has a maximum profit potential of $745 at this point. He's limping with 22 days to go. But trading the iron condor successfully is all about salvage operations - if you can salvage a small gain or even a small loss in the "bad" months, and take the gains in the "good" months, you can trade this strategy profitably. The key is learning to consistently manage the risk.
