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I have certainly been surprised that this rally has been so consistently strong with little or no pullback - well, just when the market has convinced us to close all of our shorts, it drops a few percent! Some would argue whether the last few days of trading constitute a correction, but that is semantics in my book. The Russell 2000 Index (RUT) hit a high of $551 in November of last year and today's close at $548.18 is certainly in the neighborhood of that support level; also note that the RUT was consolidating at this resistance level from about July 23-30 before moving higher. So now that $550 level is serving as support. I would not say today's action constituted a definite break of support because today's trading was pretty tightly contained in the $547-$550 range. If it does break through, the next expected support level would be $535, the high that was set in early June.
A global sell-off was triggered by a lower than expected GDP report from Japan; natural gas and crude both closed lower; Gold broke through its 50 day moving average. The question for market forecasters now: is this just a minor pull back in a strong rally? Or, have the markets turned pessimistic about the state of the economy and we are headed lower?
My August iron condor has been sitting on the edge of being closed out for several trading sessions, but the last two days of trading have pulled it out of danger. The short $590 calls now are 3 standard deviations OTM and the short $490 puts are over 4 standard deviations OTM. As long as they remain > 2 standard deviations OTM, I will allow those positions to expire worthless. The position P/L = -$740, with delta = +$14 and theta = +$186.
On the other hand, today's downward action forced me to adjust my September iron condor. The short $510 put was sitting at a delta > 20 this morning, so I bought one Oct $510 put for $15.90 to hedge the position. This position now consists of 10 contracts of the $620/$630 calls, 10 contracts of the $500/$510 puts, and one contract of the Oct $510 puts. I wanted to add another ten contracts to this position today, but today's downward move was too great, so I will wait and see if support is broken tomorrow. The position P/L = -$30, with delta = -$9 and theta = +$31.
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As you know, I have continued to be surprised by this strong rally in the markets because I still see significant current economic problems and I am concerned about the future implications of the huge federal spending spree. I read and listen to various analysts with similar viewpoints. But today, it suddenly hit me: when everyone is bearish, is that the classic contrarian bullish signal? Since my favored trading strategies are delta neutral, predicting tomorrow's market isn't really relevant to the month to month trading of this blog, but the overall market trends are relevant to my long term investments.
Weak retail sales held the market down through most of the day, but some strong buying pushed the indexes higher in the last hour of the day's trading. RUT closed at $575 and the S&P 500 closed just below $1013. The markets appear to be strongly holding these general levels and even making small advances. The absence of a significant sell-off after such a strong and quick run upward suggests a strong bullish bias in this market.
My August RUT iron condor stands at a P/L of -$2,570, delta = -$114 and theta = +$263. The accelerating theta decay is helping us stay in this position in these closing days of the trade. As I have said previously, this position will be a loser; the question is how much of a loser? Our "line in the sand" is to keep the loss below the original credit of $4,000.
Our freshly minted September RUT iron condor at 500/510 and 620/630 stands at a P/L of -$70, delta = -$26 and theta = +$59. I am looking for the opportunity to add another ten contracts to this position, but I am waiting for RUT to either 1) trade enough higher so I can add 640/650 on the top side, or 2) a slight pullback that would enable me to just add to the current strikes.
I will be traveling tomorrow to attend a wedding in Colorado, and my blog will return on Monday.
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Weakness in the financial stocks was triggered by CIT's announcement
that it is delaying its quarterly filing. The selling spread across the
board, but significant support levels were held; the SPX closed at $994
and RUT closed at $562. A common explanation among the talking heads
was that the market was waiting on the FOMC announcement tomorrow
afternoon. I am more inclined to see this as a needed breather from the
incredible rally over the past several weeks. Trading has remained in a
reasonably tight range over the past few sessions and even on down days
like today, no heavy broad based selling has broken out. That tells me
that the large institutional players may be taking some very selective
profits, but, in general, are not selling. Of course, the wrong
comments from the Feds tomorrow could change that situation very
quickly.
This pullback to $562 today removed some of the pressure on my August
condor; the position P/L improved to -$1,640 with delta = -$51 and
theta = +$172. My short 590 calls are now more than one standard
deviation OTM with nine days remaining.
I had my doubts about initiating my Sept iron condor today with the
FOMC meeting in progress. So I compromised and established 10 contracts
of the 620/630 calls for $1.00 and 10 contracts of the 500/510 put
spreads for $1.30 for a total credit of $2,300. I intend to add 10 more
contracts after the announcement tomorrow or later this week. This
position has a delta = -$4 and theta = +$55 with 37 days to expiration.
I positioned the short strikes just outside of one standard deviation.
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Yesterday, it appeared that everyone was either waiting to see what the Fed had to say this afternoon or were actually trimming positions to be prepared for bad news. But this morning, the traders appeared to decide the FOMC report would be positive and we had a strong market all day; even some late selling at the close was unable to trim the gains substantially. Nothing really new came out of the FOMC; interest rates will be held at their low points and they reaffirmed that they believe the recession is leveling out. RUT closed at $572 and the SPX closed at $1005.
This move up today pushed my Aug iron condor back into a weaker position with a P/L of -$1,890, delta = -$91, and theta = +$141. The Sept iron condor at 500/510 and 620/630 that I initiated yesterday stands at a delta of -$18 and theta = +$62. I will be looking to add another ten contracts to that position tomorrow. If the market moves upward, I will probably look at adding the 640/650 calls and 520/530 puts to keep the entire position more delta neutral.
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It was a boring day in the markets. Less than one billion shares traded on the NYSE - the lowest number in two weeks. Given the huge run since the first week of July, the market is due for a breather, so the trading range of the last few sessions isn't too surprising. The RUT index closed essentially unchanged at $571.87. RUT has closed at about $570 in three of the last four sessions. Today's doji candlestick is further evidence of the market's indecision.
My August iron condor remains in limbo with a position P/L of -$2,380, delta = -$92 and theta = +$125. Notice how theta is beginning to accelerate in these last few days before expiration. The delta of my short $590 calls is 26 and one standard deviation on the RUT is $27. So my short calls are just over one standard deviation OTM. The 590/600 spread was established for a credit of $1.10 and the ask price to close it is $2.10. By all measures, this position is just on the edge of being closed out or moving into safer territory.
I intended to establish some Sept condors today, but I had an unusually busy schedule in the office and wasn't able to carve out sufficient time to look at the possibilities. There is a lesson here - always remember that waiting or choosing not to trade is rarely a bad decision. Rushing to judgment can lead to trouble in this business. Always take the time necessary to follow your system. Sometimes students hear an instructor say he or she always puts on the iron condor at 49 days (or whatever number), and the student takes this as an absolute dictum that rules out 50 days or 45 days. Those are guidelines; don't treat them as absolute rules that may force you into a trade without following all of your procedures.
