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Higher jobless claims than expected only caused a momentary pause in the market this morning. By noon, everything was headed up for the day. The RUT closed at $568.68 and SPX closed at $1007.37. RUT is closing in on its previous high of $575 and SPX is back above the $1000 resistance level. This market continues to show significant underlying strength. On the other hand, the trading volume this week has been somewhat below historic averages, so the big players may be still waiting to make their move.
As I mentioned yesterday, I was planning to close my August $590/$600 calls if RUT moved up much at all. So I entered orders to close those spreads this morning. I entered my order at the ask price of $0.10 and left it out there for about 30 minutes. I have seen this before; when you get down to the last hours before expiration, the market makers don't have any interest in the worthless long options of our far OTM spreads (the $600 calls in this case). So I cancelled my order and bought back the $590 calls for $0.05, effectively closing that side of the condor. I will allow the $480/$490 put spreads to expire worthless. Assuming tomorrow's settlement price for RUT is above $490 (hopefully that is a safe assumption!), my August iron condor ends its life at a net loss of $810, or 5% on the capital at risk in this trade. One of my rules for trading the iron condor is to control my losses in these crazy months to less than the profit of a good month. Since we started this condor with hopes of a $4,000 profit, my $810 loss is very acceptable. This condor was one of the most active positions I have ever managed; note that I started with an adjustment early to protect the downside, and then scrambled for the rest of the time buying hedges and rolling spreads up in front of July's strong rally. It may seem bizarre to some people, but I am very proud of my $810 loss; the last 55 days have been a wild ride. To escape and only give up about 20% of a typical month's gains is a victory.
My Sept RUT iron condor stands at a P/L of +$160, delta = -$47 and a +$194 theta, so it is in an excellent position and no adjustments are necessary.
I opened an October iron condor on RUT today: 15 contracts of the $640/$650 calls for $0.90 and 15 contracts of the $460/$470 puts for $0.70, for a total credit of $2,400. Plus or minus one standard deviation spanned $499 to $630 when I established this position this morning. So the calls are just outside of one standard deviation, but I allowed extra safety margin on the downside. I just can't develop any confidence in this economy with record unemployment, foreclosures, bankruptcy and spiraling government deficits. Hence, I want some extra breathing room on the downside.
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Today's trading was erratic but ended on a reasonably positive note as the government's report of declining oil inventories boosted hopes for a recovering economy. RUT closed at $561.65 and SPX closed at $996, just under the psychologically significant $1000 mark. It appears the markets are "treading water" for a bit and the bull rally is still alive; however, it is a nervous market and some unexpected economic news could send it south in a hurry, so be careful. Have your stop loss orders entered and ready to automatically trigger.
My August iron condor stands at -$570, delta = -$7 and theta = +$298. The $590 call is over three standard deviations away from the current index price of $562. That $28 of safety margin is borderline. A $28 gap up in RUT for the settlement on Friday morning would be unusual, but it isn't unprecedented in the last several volatile months. Therefore, if the RUT trades upward tomorrow, I will close the $590/$600 call spreads and allow the $480/$490 put spreads to expire worthless.
My September iron condor stands at -$170, delta = -$28 and theta = +$193, an excellent theta/delta ratio. No adjustments are necessary.
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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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The Russell 2000 Index (RUT) held its support level at $550 and closed at $556.43 today. The SPX closed up at $989 but remains below its critical resistance level of $1000. The consensus of the talking heads was to credit the positive earning announcements from Home Depot and Target for today's market strength. I am inclined to think the market just needed a breather. When it goes up that far that fast, the slightest twitch will set off profit taking and that is what happened yesterday.
My August iron condor stands at a P/L of -$590, delta = -$7 and theta = +$147. The $590 strike is now almost three standard deviations OTM and the $490 strike is over five standard deviations OTM. As long as these strikes remain greater than two standard deviations OTM, I will allow the position to expire worthless.
I purchased one Oct $510 put yesterday to hedge my Sept iron condor position; the delta of the Sept $510 puts dropped to 18 this morning, so I sold the Oct put for $12.50, a loss of $340. I added 20 contracts of $620/$630 call spreads at $0.50 and 20 contracts of $480/$490 put spreads at $0.70. My Sept Iron Condor position now consists of 30 contracts of the $620/$630 calls, 10 contracts of the $500/$510 puts, and twenty contracts of the $480/$490 put spreads. The total net credit now stands at $4,360 with a current P/L = -$440, delta = -$5, and theta = +$184.
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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.
