Dr. Duke's Blog

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Written by Dr. Duke

Created: 14 September 2011

Today turned out to be a positive day in the markets, but this morning illustrated the extreme precariousness of this market. The market opened up positively and traded upward, and then lost about $12 in about 5 minutes or less. As it turned out, the panic was based on a report of a committee vote in Austria dealing with procedural agenda arrangements for the eventual vote of their Parliament on the European bailout package. Within a few minutes, the markets recovered and traded upward steadily until the last 30 minutes of the day, when they sold off. SPX ran as high as $1202 before closing at $1189, up $16 for the day. RUT gained $12 to close at $704. Markets were encouraged by reports that the leaders of Germany and France assured Greece they would have emergency loans available to prevent default until the European Union bailout package became available.

Retail sales came in flat for August as did the PPI. A flat PPI was reassuring since many analysts have been concerned about inflation heating up. But flat retail sales were a concern.

Trading volume in the S&P 500 rose to the 50 dma at 3.6 billion shares; trading on the NYSE dropped 2% while volume rose on NASDAQ by 19%.

Today's trading reinforced two conclusions about this market: 1) It is an extremely volatile market - and those words don't do it justice. It can turn and run you over while you go to get a snack. 2) We are trapped in a trading range of about $1120 to $1220 (you might define the range a bit differently if you use the intraday highs and lows). Be cautious.

My September condors are well positioned to have all of the current remaining spreads expire worthless. All of the spreads are over two standard deviations OTM. My Oct condor stands at a P/L of -$3,000 with delta =-$70 and theta = +$120. The call spreads at 770/780 are under pressure. We'll see what tomorrow brings.

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Written by Dr. Duke

Created: 13 September 2011

The markets traded upward once again today, but trading volume dropped across the board - not as bullish as it might appear. SPX gained $11 to close at $1173 and RUT closed at $692, up $12.  Trading volume in the S&P 500 stocks was down to 3.2 billion, down from yesterday and further below the 50 dma. Trading volume declined 4% on the NYSE and was down 3% on NASDAQ. The SPX chart is trapped in the range of $1120 to $1220. When one analyzes the various issues worrying the market (European debt, US debt and the lack of political courage to deal with the problem, intractable unemployment, etc.), it is hard to imagine any quick fixes. Therefore, range bound trading may be our environment for some time. Directional trading has to be very short term; Jeff Macke refers to this as a "Wolf Market": not bullish, not bearish, requiring the successful trader to trade in and out quickly. Directional trading is never easy, but when the "trend" is a matter of a few days, directional trades are particularly challenging. In this environment, trading delta neutral is very attractive. But the rub here is knowing how to adjust the trade as the market swings rapidly back and forth.

My September iron condors on RUT are cruising into expiration for a nice profit (13% and 17%). All of the spreads are in excess of two standard deviations OTM, so the probabilities of these spreads expiring worthless is very high. The Oct RUT iron condor stands at a P/L of -$2,600 with delta = -$57 and theta = +$128. The short calls have deltas of about 17 so we are close to requiring an adjustment if the market continues upward.

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Written by Dr. Duke

Created: 12 September 2011

After trading as low as $1136, the S&P 500 rallied late in the day to close with a gain of $8 at $1162. RUT also closed higher at $680, up $6. The European debt problem remained at the center of traders' worries this morning, and news that China may be considering buying a large portion of Italy's bonds rallied the market toward the end of the day. But a rally of this magnitude was surprising. All of the major indexes closed for gains today after seeing severe losses earlier. The SPX touched $1136 at the low of the day, a little below the low of September 6th, and almost exactly the low of August 26th. Many market analysts have been watching for a bounce off of support before triggering any buying - was this it? I don't know; the market remains very skittish, and we have not actually had the worst headlines yet: Greece defaults, etc. This market's weakness has been largely anticipatory of those headlines. The VIX pulled back to 39% today, but that is still pretty elevated. Some analysts believe we still have lower prices in store before we can rally, e.g., breaking the support on SPX at $1120 before trading upward. Trading volume in the S&P 500 was down from Friday at 3.4 billion, below the 50 dma. Trading on the NYSE was down 9% and trading volume on NASDAQ was down 3%.

My two Sept RUT condors remain open; both spreads in both condors are over two standard deviations OTM, so I have left the spreads open thus far. The Oct condor on RUT stands at a P/L of -$2564 with delta = -$46 and theta = +$139. The elevated volatility is pushing the P/L lower; the call spreads are one standard deviation OTM and the put spreads are over two standard deviations OTM.

I will continue to watch the major support levels on SPX for directional clues; until I see a definitive move higher or lower, I will only be trading delta neutral positions. At times like these, the delta neutral trade presents a very attractive alternative. It is nice to be making money without making any predictions about the market.

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Written by Dr. Duke

Created: 09 September 2011

Obama's jobs plan didn't impress Wall Street, and, if that wasn't bad enough, a resignation in protest at the European Central Bank stoked fears about the European debt crisis. Together, a session dominated by selling was the result. SPX dropped $32 to $1154 and RUT lost $21 to close at $674. Trading volume rose to 3.8 billion shares of the S&P 500, topping the 50 dma at 3.6B. Trading on the NYSE rose by 29% and trading volume on NASDAQ increased 4%. The major indexes closed near their lows for the day and remain firmly lodged in the trading range of the past several weeks.

The spreads of my September condors all passed the two sigma test, so I left them open, but will be watching them closely as we enter expiration week. Both positions are profitable at this point, but the 600/610 put spreads in the one condor are being pressured; they were almost two standard deviations OTM at the close. The Oct condor stands at -$1664 with delta = -$33 and theta = +$97. I removed the call hedges on this position this morning.

Have a nice weekend.

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Written by Dr. Duke

Created: 08 September 2011

The markets appeared to be treading water today as they waited on Bernanke's speech this afternoon (nothing new there), and then took some risk off the table in anticipation of the market's reaction tomorrow morning to Obama's speech this evening. SPX closed at $1186, down $13 and RUT lost $15 to close at $695. Trading volume was up a bit from yesterday at 3.3 billion shares of the S&P 500, but remained below the 50 dma. Trading on the NYSE was up 1% while trading volume on NASDAQ rose 10%. Markets tried to rise this morning but just could not hold the gains as traders slowly sold off all afternoon.

It is hard to anticipate what may ultimately move this market one way or the other. Personally, I doubt Obama's speech will be the tipping event. Traders are looking for some free enterprise rhetoric but this administration doesn't trust free markets. We may be stuck in this tenuous trading range for a while.

My two iron condors on RUT stand at a P/L of +$1564, with delta = +$27 and theta = +$133, and a P/L = +$3020 with delta = +$9 and theta = +$69. I will apply my Two Sigma Rule to these positions tomorrow and possibly close some of the spreads. The Oct condor is hedged and stands at a P/L of -$2100 with delta = -$7 and theta = +$61.

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Written by Dr. Duke

Created: 07 September 2011

The German court ruling that Germany may participate in bailing out European Union members sparked a strong rally around the world. SPX gained $33 to close at $1199. RUT closed at $709, up $29. SPX could not get past $1220 about a week ago, so that will be the level to watch this week. The VIX dropped to 33% today, but that is still reasonably high; it suggests that traders are still rather cautious; it will take very little stimulus to start the selling. Trading volume in the S&P 500 actually fell a bit from yesterday to 3.1 billion shares, below the 50 dma. Trading was also down by 17% on the NYSE, but was up 3% on NASDAQ.

Tomorrow could be another volatile day in the markets due to Obama's speech to Congress. (Trivia: do any of you remember the name of the movie where the Martians blew up Congress?)

I will continue to watch $1120 and $1220 as the critical support and resistance levels that are defining this trading range on SPX. I will be cautious about any directional trades until we definitively break one of those levels.

Our September iron condors on RUT are in excellent shape. The condor with the 600/610 put spreads stands at a P/L of +$1,384 with delta = -$2 and theta = +$215. The Sept condor with the 560/570 put spreads stands at a P/L of +$2,720 with delta = -$15 and theta = +$163 (both Sept positions with 20 contracts). Today's rally forced me to hedge my Oct iron condor on RUT, so it is underwater, but the Greeks show that it is well hedged with position delta = -$13 and position theta = +$57 (on 20 contracts).

I have partnered with Mike Parnos to host a seminar in Las Vegas November 19-20. We are restricting the number of attendees so we can have a very personal and interactive meeting. You can read more about the conference here.

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Written by Dr. Duke

Created: 06 September 2011

The most obvious aspect of recent markets is the extreme volatility. Today was one more example. SPX opened at $1174, plunged to $1140 and then rallied to make up most of those losses, closing at $1165, down $9 for the day. RUT behaved similarly, closing at $681, down $2 after trading as low as $664. RUT is trading in a broad consolidation range from $650 to $735. It is hard to see a trend at this point. This volatility isn't likely to abate any time soon. The German courts rule tomorrow on whether it is legal for Germany to bail out other European Union countries. On Thursday, we have both Bernanke and Obama speaking. It is very difficult, if not impossible, to predict a market trend in the midst of these news events. And, as we have seen for several weeks, traders continue to worry about the European debt issues and the slow rate of economic recovery here in the states - even though that is all old news. The ISM Services Index came in at 53.3 for August, up slightly from July's 52.7, another indicator of slow, but positive, economic growth.

My Sept iron condor on RUT at 600/610 and 780/790 stands at a P/L of +$684 with delta = +$41 and theta = +$173. My Sept iron condor on RUT at 560/570 and 780/790 stands at a P/L of +$2,600 with delta = +$15 and theta = +$120. The Oct iron condor on RUT at 500/510 and 770/780 stands at a P/L of -$1140 with delta = -$46 and theta = +94. This market is basically trading sideways - great for condor traders. But the extreme volatility taxes our adjustments and our discipline. The July, August and September condors have proven to be good measures of the condor trader's skill level. If you are making money in these markets, you have passed the test.

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Written by Dr. Duke

Created: 01 September 2011

The markets reacted positively to the ISM manufacturing index reading of 50.6 for August, essentially flat from July's 50.9. But those gains couldn't hold as traders looked forward to the jobs report tomorrow. SPX dropped $14 to close at $1204 on lower volume of 3.1 billion shares. RUT lost $18 to close at $709. Trading volume also dropped on the NYSE (-10%) and on NASDAQ (-13%).

Both yesterday and today SPX tried to break through $1230 but couldn't make it. This isn't very bullish behavior; we are still well below the 50 dma at $1255 which will likely provide stronger resistance. Traditionally, breaking through the 50 dma strongly in either direction is a strong signal for the continuation of that trend, whereas bouncing off the 50 dma is often the sign of a reversal or a sideways consolidation period. Many market analysts are watching for signs of a possible drop to re-test the lows in August. Thus, SPX's behavior at $1230 and at the 50 dma will be closely watched. As today's trading session drew to a close, traders were paring back on positions ahead of tomorrow's non-farm payroll report, aka, the jobs report.

My RUT Sept iron condor position stands at a P/L of +$824 with delta = -$11 and theta = +$162. The Oct condor remains hedged and stands at a P/L of -$2,130 with delta = -$10 and theta= +$48. The jobs report in the morning will likely create a bout of market volatility in the opening hour of trading - don't jump either way too quickly.

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Written by Dr. Duke

Created: 30 August 2011

Markets were a bit weak today, but managed to tack on small gains. SPX gained $3 to close at $1213 and RUT closed at $728, up $3. Trading volume increased a bit with 3.1 billion shares of the S&P 500 trading, still below the 50 dma at 3.6B; trading volume was up 13% on the NYSE and was up 15% on NASDAQ. The Conference Board's Consumer Confidence Index plunged to 44.5, the lowest reading since April of 2009. But that didn't seem to weigh on the markets very much. The FOMC minutes didn't seem to make much of an impact on trading, but the extraordinary disagreement within the committee was widely discussed.

Both SPX and RUT have now closed solidly above the highs reached a couple of weeks ago as the markets last rallied, before crashing down to re-test the early August lows. But we are still a long ways from a recovery. But so far, the market is showing reasonable resilience to bad news such as today's consumer confidence data.

My Sept iron condor stands at a P/L of -$876 with delta = -$92 and theta = +$205. The Oct condor is hedged and stands at a P/L of -$2900 with delta = -$6 and theta = +$39.

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Written by Dr. Duke

Created: 29 August 2011

The severity of hurricane Irene was less than hyped by the media - have you noticed how everything is breathlessly covered as another "sky is falling" event? Remember the upcoming U.S. debt default? A couple of years ago we were warned that swine flu would not lead to an epidemic but a pandemic!!

The prospect of less damage than expected started a market rally this morning that surprised me by sustaining itself throughout the day. I expected some profit taking to slow it down a bit, but markets traded steadily stronger all day, closing at or near highs for the day. SPX closed at $1210. This broke through the highs set around $1205 in mid-August as the market tried to rebound. RUT closed up $33 at $725, also breaking through the high around $720 set in mid-August before the markets collapsed once again. However, trading volume was low with 2.7 billion shares of the S&P 500 stocks trading today; the 50 dma is 3.6B. Trading on the NYSE was down 20% and trading volume was down 13% on NASDAQ. Maybe everyone stayed home, expecting Manhattan to be underwater.

Many technical experts are warning us that this rally could be short lived and exhibit a re-test of the recent lows within the next month. To be sure, we are in a deep hole. SPX would have to break through $1260 just to return to the trading range of March through July and break even for the year. And SPX will have to break $1365 to reach new highs for 2011. That's a long ways from here. It is natural to be optimistic and hopeful that the bullish rally will resume, but a review of the damage in August is a bit daunting.

My Sept iron condor on RUT stands at a P/L of -$536 with delta = -$55 and theta = +$214. My Oct iron condor on RUT at 500/510 and 770/780 is hedged with Nov $770 calls and stands at a P/L of -$2,460 with delta = -$13 and theta = +$32. Both positions consist of twenty contracts. Assuming all the traders return tomorrow, will they take some profits? There are many bargains in stocks out there, but pick carefully and proceed slowly.