Dr. Duke's Blog

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Written by Dr. Duke

Created: 26 August 2011

The markets appeared to react negatively this morning to the downward revision of second quarter GDP as much or more than to Bernanke's remarks in Jackson Hole. But those bearish traders didn't hold sway for long; the market bounced back strongly with the SPX rising over $18 to close at $1177. RUT increased $17 to close at $692. Today's strong market was a bit surprising, given all of the bearish talk all week about Europe and the need for Bernanke to propose some kind of stimulus for the economy. The VIX spiked up to 44% this morning, but then pulled back to close at 36%. Trading volume in the S&P 500 declined to 3.4 billion shares, below the 50 dma. Trading on the NYSE was down 6% and volume was up 3% on NASDAQ.

Recent market action appears to be confirming the lows of $1120 on SPX and $650 on RUT as the bottom of this correction. But it may be early to be too sure of any conclusions here. It is a long climb back out of this hole to start talking about resumption of a bullish trend.

My Sept iron condor on RUT at 600/610 and 780/790 stands at a P/L of -$216 with delta = +$24 and theta = +$117 (20 contracts). In the course of the strong market swings of the past few weeks, I ended up with another Sept iron condor on RUT at 560/570 and 780/790; it stands at a P/L of +$1,820 with delta = +$4 and theta = +$107 (20 contracts). It may be tempting to start buying selectively at this point, but be cautious - this is a very nervous market. I strongly prefer my delta neutral trades in this environment.

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Written by Dr. Duke

Created: 25 August 2011

The markets opened up positively this morning but immediately began to sink and all of the major market indexes closed down for the day. SPX closed at $1159, down $18 and RUT also lost $18 to close at $674. Trading volume in the S&P 500 was up a little at 4.1 billion shares; trading was up 7% on the NYSE and was down 4% on NASDAQ. All anyone could talk about today was Bernanke's speech tomorrow and the effect of Steve Jobs leaving Apple. Apple's stock recovered much of its early losses, so it appears the market isn't too concerned about Apple's pipeline of products. The common opinion on the street is that Bernanke won't commit to anything tomorrow. One has to wonder if today's sell off is simply pricing in a "no comment" speech tomorrow. The bigger question is what has been worrying many traders: is this August collapse a severe market correction or the beginning of a bearish trend?

My Sept RUT condor stands at a P/L of -$474 with delta = -$17 and theta = +$44. I had to hedge it again today on the put side just in case Bernanke's comment rattle the market - this is a very nervous market. Rumors send traders running for the exits. Everyone has been so busy speculating about Bernanke's speech, that this may be the classic, "it's baked in the price" situation and we end up with minimal market movement tomorrow. But I hedged my condor anyway - risk management is the key to success, not reading the tea leaves.

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Written by Dr. Duke

Created: 24 August 2011

The markets staged another strong rally today. SPX traded upward by $15 to close at $1178 and RUT closed at $693, up $10. The only economic news was the durable orders report, up 4% in July, a big improvement from June's 1.3% decline. However, I don't think that sparked the rally; it appears the market is convinced Bernanke will announce something Friday that will be bullish for equities. Trading volume in the S&P 500 came in at 3.6 billion shares, just above the 50 dma at 3.5 billion. Trading was down 8% on the NYSE and was down 13% on NASDAQ. I'm not sure what became of all of the panic over Europe and the double dip? It could come back with a vengeance depending on even slight nuances from Bernanke on Friday. Stay alert.

My Sept iron condor on RUT stands at a P/L of +$600 with position delta on 20 contracts of +$12 and theta = +$122. How did your portfolio fare during this extreme bout of market volatility in August? My Flying With The Condor™service is up 24% for the year. One of my clients sent me this email today, "Thanks again for saving my butt through this latest downturn. I was amazed at how well the adjustments worked. Very little damage in my accounts".

Would you like to learn to trade delta neutral and survive extreme markets such as those we just experienced? Sign up for the Delta Neutral Options Trading course that starts next week.

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Written by Dr. Duke

Created: 23 August 2011

The markets opened up strongly this morning and, unlike most days recently, stayed on that positive track all day, leading to positive gains across all of the major market indexes. SPX tacked on $39 to close at $1162. RUT closed at $683, up $32. Trading volume was up in the S&P 500 stocks, with four billion shares trading. Trading volume was up 2% on the NYSE and was up 10% on NASDAQ.

The only economic data out today was the report of new home sales for July; they came in at 298k, about even with the 300k in June. Many traders are anticipating something positive for the markets from Bernanke's speech at Jackson Hole on Friday, but that worries me a bit - what if Bernanke disappoints? This is an extremely nervous and volatile market.

My Sept iron condor on RUT is still hedged; I have learned the hard way not to remove my hedges too soon. What I lose on the hedge options is relatively small compared to the potential losses on the condor spreads if the market whipsaws. That position stands at a P/L of +$480 with position delta = -$16 and theta = +$39 on 20 contracts.

Today's market probably makes us all feel better, but this remains a very dangerous market. As always, it pays dividends to be strictly following your risk management rules.

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Written by Dr. Duke

Created: 22 August 2011

Markets jumped up at the open, but gave back the gains by noon and traded weakly into the close. Most of the major market indexes closed virtually unchanged for the day on lower volume. SPX closed at $1124, unchanged for the day and RUT was also unchanged at $651. Trading volumes dropped from Friday, which was expiration Friday; options expiration normally results in higher volumes. 3.7 billion shares of the S&P 500 traded today, just above the 50 dma of 3.5B. Trading was down 20% on the NYSE and was down 18% on NASDAQ.

The charts appear to show a building of support at $1120 on SPX and $650 on RUT. Today's candlestick on SPX was a shooting star; that may be ominous for tomorrow. Instead of building a support level, we could be pausing for the next leg down in a bear market.

RUT settled Friday at $651.70 so both of the remaining spreads in my RUT iron condor for August expired worthless for a loss of $356 on 20 contracts or a 2% loss on the capital at risk. The Sept condor stands at a P/L of +$700 with delta = -$4 and theta = +$14. Now we go back to watching to see which way this market turns: building support or about to tip over into a bear trend downward?

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Written by Dr. Duke

Created: 18 August 2011

The markets logged another huge trading range day, so the price volatility records continue to be broken. SPX closed at $1138, down $56 while RUT lost $42 to close at $663. The major indexes didn't close at their lows, but they were not far off the lows of the day. Trading volume spiked back up, with 5.1 billion shares of the S&P 500 trading today. Trading volume rose 63% on the NYSE and rose 45% on NASDAQ. The European debt crisis continues to dominate the news and worry traders. But the Philadelphia Fed survey for August spooked them even more with a drop from +3.2 to -30.7 in one month. Existing home sales also dropped to an annualized rate of 4.67 million. Leading indicators rose 0.5%, providing one glimmer of good news.

Many market observers expected a retest of the recent lows, but I think the strength and range of today's move was unnerving. The lows on SPX were around $1120 and SPX only traded as low as $1131 today. Many stocks are trading at bargain basement levels; will this tempt the bulls to reappear? Or is the fear over European debt too compelling?

My Aug 600/610 put spreads were three standard deviations OTM, and the 750/760 call spreads were even farther OTM, so I allowed both spreads to go into expiration and presumably expire worthless. This will complete my Aug iron condor on RUT with a loss of $356 on 20 contracts or a 2% loss. The Sept position is hedged and stands at a P/L of +$460 with delta = -$12 and theta = +$2. I wonder what surprise the market will bring us tomorrow?

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Written by Dr. Duke

Created: 17 August 2011

The S&P 500 index couldn't hold above $1200 once again, closing at $1194, up $1. RUT closed down $1 at $704. Trading volume declined once again to 3 billion shares of the S&P 500 stocks. Trading volume on the NYSE dropped 15% and volume dropped 8% on NASDAQ. When one looks at the SPX chart, it is easy to postulate two very different conclusions: either a sideways consolidation pattern is developing or a downward trend is underway. The strong bullish trend ended in mid-February and we have been trading sideways ever since; of course, the decline of the past couple of weeks was a rude departure from that sideways trend. So now either of two cases can be made: 1) we are still in the sideways consolidation pattern, but just had a slight hiccup courtesy of the S&P bond downgrade, or 2) we started a downward trend on May 1. It is becoming harder to see this as a temporary respite from the bullish trend. The U.S. and European sovereign debt issues are the dark clouds hanging over this market; it is hard to imagine a strong bullish trend resuming.

The markets have cooperated with my August iron condor with put spreads at 600/610 and call spreads at 750/760. The put spreads are 7 standard deviations OTM and the call spreads are 3.5 standard deviations OTM. Thus, unless something dramatic happens tomorrow, I will allow both the call and put spreads to expire worthless this weekend. Currently the P/L for the 20 contract position stands at -$516, delta = -$10 and theta = +$550. The Sept iron condor on RUT is positioned at 600/610 and 780/790. Both spreads are outside of one standard deviation OTM and the P/L on 20 contracts is +$1,780 with delta = -$21 and theta = +$130. Watch that $1200 level on SPX for your clue on this market.

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Written by Dr. Duke

Created: 16 August 2011

The S&P 500 couldn't hold above the $1200 resistance level, but it didn't falter badly. SPX closed at $1193, down $12 for the day, but it closed well above its low of the day at $1181. RUT closed at $705, down $14. Trading volume was down on the NYSE by 6% and was down 7% on NASDAQ, but trading of the S&P 500 stocks was flat at 3.4 billion shares, right at the 50 dma. Economic data started the market off on the wrong foot this morning. The annualized rate of housing starts dropped to 604 thousand for July, down from 613k. Similarly, building permits dropped to an annualized rate of 597k. However, industrial production rose 0.9% in July and capacity utilization rose to 77.5% in July from 76.9% in June.

The fact that the SPX traded as low as yesterday's opening, but could not hold those lows was a good sign today. It may not be a bullish sign, but it may be a sign of a base-building pattern. That certainly beats beginning a downward trend. The VIX popped back up a bit today to 33%, reflecting continued trader anxiety - not too surprising. We certainly have a long list of sovereign debt  issues with very little hope that anyone in any of the affected governments have the courage to deal with the issues (including here at home).

My Aug condor stands at a P/L of -$956 with delta = -$42 and theta = +$742 on 20 contracts. The call spreads are about two standard deviations OTM and the put spreads are over five standard deviations OTM. The Sept condor on RUT stands at a P/L of +$720 with delta = -$39 and theta = +$154 (also 20 contracts).

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Written by Dr. Duke

Created: 15 August 2011

The markets rallied again today, appearing to confirm at least a short term bottom to the market declines of the past several weeks. SPX closed up $26 at $1204. RUT closed at $719, up $21. The strength and breadth of this rally is strikingly strong; it makes me wary of a retest of the recent lows sometime soon. Trading volume has declined every day since it peaked on August 8th. Today's markets saw 3.4 billion shares of the S&P 500 trade; this is right at the 50 day moving average. Trading volume declined 17% on the NYSE and declined 13% on NASDAQ. There wasn't much economic news today; the Empire Manufacturing Index dropped to -7.7 for August from last month's weak -3.8. But traders appeared to shrug that off today. Another bullish sign today was SPX's ability to break through resistance at $1200 and hold for a close above that level. But will it hold tomorrow? VIX dropped to 32% today, but is still elevated, reminding us of the recent carnage.

My August iron condor on RUT with the 600/610 put spreads and the 750/760 call spreads stands at a P/L of -$1236 and delta = -$89 and theta = +$492. Delta of the $750 call is 7, so I may be able to nurse this trade along a bit before having to close the call spreads. The put spreads are over two standard deviations OTM, so I will allow them to expire worthless. My Sept RUT iron condor consists of the 600/610 put spreads and the 780/790 call spreads. This position stands at a P/L of +$280 and delta = -$52 and theta = +$152. The delta of the $780 call = 15, so I may have to adjust this position soon if this strong rally continues.

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Written by Dr. Duke

Created: 12 August 2011

The markets seemed to calm down significantly today. Trading volume dropped to 4 billion shares of the S&P 500; that remains above the 50 dma, but is well below the peak at nearly 8 billion shares on August 8. In addition, the trading range dropped back significantly. SPX closed at $1179, down $6, but its trading range was about $18, well below the $50 - $80 ranges of the last few days. RUT closed at $698, down $2. The drop in initial unemployment claims yesterday may have had a calming effect as that data was digested. It is interesting that so many analysts on CNBC have compared the past few days to the drops in 2008 and 2009. But if you review those charts, you will find those were orderly markets compared to the past few days. We have experienced 5 of the past 7 trading sessions with swings in the SPX of $50 or more. And consider this past week: we dropped $80 on Monday, gained $50 on Tuesday, lost $50 on Wednesday and then gained $50 on Thursday - you will be hard pressed to find anything similar in the history books. Today's $18 range on lower volume was a breath of fresh air.

My Aug condor is slowly working off its loss; it is now $1700 underwater with a delta of -$31 and theta = +$362. The Sept condor stands at a P/L of -$360 with delta = -$20 and theta = +$137 (both with 20 contracts). If (big if) this market crisis is over, our condors have survived well; the Aug condor is likely to close within our goal of minimizing the loss to less than a good month's gain, and the Sept position is sitting delta neutral with a good shot at a healthy profit for the month. But we'll see; the game isn't over quite yet. In any case, I am ready to relax; enjoy your  weekend.