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Significant drops overnight in the Asian markets caused concern for traders here and those concerns even affected the commodities markets, with oil trading below $70 and gold trading down to $954. Some strengthening occurred late in the day that pared losses, so the market appears to have an underlying strength. Trading volume was up somewhat, but still at low values historically. RUT closed down over $7 to $572.
My Sept iron condor now stands at a P/L of +$2100, delta = -$30 and theta = +$165. The Oct iron condor stands at a P/L of +$70, delta = -$29 and theta = +$59. All of my short strikes are more than 1.5 standard deviations OTM at this point. But, as we have seen repeatedly in this market, all of that can change pretty quickly.
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Favorable earnings announcements and outlooks from Intel and Dell boosted the markets this morning, but the sellers came out of the woodwork and took their profits, driving the market down for most of the day. RUT closed down at $580 and the SPX closed down at $1029. It appears this market senses that all of the good news has already been priced into stocks and is prepared to take profits on any rally. However, the trading volume has been low, so drawing conclusions from the price movements this week may be dangerous. Perhaps the rally resumes after Labor Day when everyone returns to the floor.
This pullback has been a welcome relief for my condor positions. My Sept iron condor now stands at a profit of $1040, delta = -$103 and a theta of +$200. The short $620 calls are back to about one standard deviation OTM. The Oct iron condor now stands at a P/L of -$230, delta = -$39 and theta = +$57. Although the $460/$470 put spreads are now about two standard deviations OTM, I will resist the temptation to roll them up. That downside cushion is welcome as the market consolidates at the current levels.
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Trading was choppy and basically sideways today on lower volume. A positive new home sales report this morning wasn't enough to push the market higher. The Russell 2000 Index (RUT) and The Standard and Poors 500 Index (SPX) closed essentially unchanged at $584 and $1028, respectively.
I track the delta of the short options in my iron condors as one measure of my risk. The delta of the September $620 call dropped to 15 today and the Oct $640 call dropped to 17. A delta of 15 for the Sept $620 call was sufficient for me to sell one of my Oct $620 call hedges at $9.00. This leaves my Sept iron condor essentially at breakeven with a delta of -$80 and a theta of +$175. What those numbers tell us is that the RUT can move up by $1 tomorrow and my position will lose $80, but the passage of one day of time will gain me $175. So I want to manage the position to keep theta much higher than delta.
The Oct $640 call delta dropped to 17, but I left the Nov $640 call hedge in place on the Oct iron condor - a borderline call. This leaves the Oct iron condor with a P/L of -$710, delta = -$24 and theta = +$47. These delta and theta numbers are smaller than for the previous trade because my October position consists of 15 contracts whereas the Sept position has 30 contracts. The Oct position also has far more days to expiration and I have only been in the trade for about one week.
If you are into market forecasting, the question is whether we are going to trade sideways and consolidate for a few weeks or whether a correction is overdue after such a large and quick run upward. Regardless of my forecast, I must be careful to only trade what the market does today and not what I think it will do tomorrow.
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Several favorable economic reports this morning failed to impress traders and the market slid in low volume trading. But buyers came in to push the market back up and in most cases had turned the red ink into positive gains by market closing. The DJIA closed at $9581; SPX closed up by $3 at $1031 and RUT closed essentially unchanged at $583.77. The RUT chart has been trading sideways between $572 and $588 for the past four or five sessions. The question on everyone's mind is whether it will suddenly break out up or down, or just trade sideways to consolidate for a while.
I had begun to take off my long call hedges yesterday, and during the market's weakness this morning, I removed the balance of the hedges from both my Sept and my Oct condors. This morning, the deltas of my short Sept $620 calls had dropped to 11 and the short Oct $640 calls had dropped to 15. I sold the Oct $620 calls at $7.50 and the Nov $640 calls at $8.90. As the market rebounded, the deltas of the short Sept $620 calls and the short Oct $640 calls had increased to 14 and 16, respectively.
My Sept condor now stands at a P/L of +$130, delta = -$151, and theta = +$210. This is a higher delta than I would like; I may end up buying long calls again to hedge this position. This volatile market has a way of jerking these positions around. At this point, I have spent a total of $911 on both put and call hedges for this condor, but a potential gain of $3,800 remains.
My Oct condor now stands at a P/L of -$650, delta = -$52, and theta = +$60. Removing the Nov call today cost me $200 (my insurance premium). Aggressively hedging my iron condors does reduce my potential gains, but protecting my downside on these positions is crucial to long term success.
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Today's trading session was remarkably similar to the pattern yesterday with a rally in the morning and then a sell off to take back much, but not all of the gains. RUT closed up about $3 at $583.22 and SPX closed up about $2 at $1028. Bernanke's reappointment reassured Wall Street; they prefer the "devil they know" to the uncertainty of a new appointee. The Conference Board's consumer confidence index improved by more than was expected. Both of these positive notes appeared to overshadow the announcements from the White House and the CBO of even larger federal deficits than projected earlier. The country seems to have its head buried in the sand, hoping the financial crisis will go away.
During the market's strength this morning, I decided it was wise to add one more Oct $620 call for $10.10 to my Sept iron condor. At the market's close, this position stood at -$245, delta = -$62 and theta = +$149. This theta/delta ratio is healthy and gives us room for the market to move up further before radical surgery is required.
The Oct iron condor at 460/470 and 640/650 stood at -$605, delta = -$21 and theta = +$44. This position still has 51 days to expiration, so a theta/delta ratio of two or more is pretty good. We have one long Nov $640 call and no additional adjustment is required as yet.
The trading of late is settling into a routine: 1) I establish my positions and the market trades upward, 2) I don't think the market can continue to increase, but it does, so 3) I hedge my call spreads, and finally, 4) I close and/or roll my spreads - interesting times in the markets.
