Dr. Duke's Blog

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Written by Dr. Duke

Created: 29 July 2011

 The markets continued their sideways to downward dance today. And the debt ceiling was all anyone at CNBC could talk about - more Chicken Little drama. Ironically, the concern appears to boil down to whether our debt will be downgraded by S&P and/or Moody's (lest we forget, the same people who said all of that sub-prime mortgage debt was just fine). Most sane observers who haven't drank the kool-aid agree that a default on the debt is very unlikely. The irony derives from the fact that it is highly unlikely that the eventual compromise in Congress will do anything substantive to actually decrease our debt or even decrease the rising rate of debt creation. So the downgrade is probably coming, and it appears that the experts aren't too sure about what that means. Many speculate about rising interest rates, but considerable uncertainty persists. And, of course, the equity markets don't like uncertainty. We "fix" uncertainty by discounting the prices.

The first quarter GDP growth was revised downward to 1.3% from 1.7% and second quarter GDP grew 1.3%. This revived talk of a double dip in the economy; that spooked traders as much or more than the debt ceiling debate. The Chicago PMI report dropped a bit to 58.8 for July (61.1 in June). So traders didn't have much good news today, and it showed in the markets. SPX closed at $1292, down $8 and RUT dropped $2 to close at $797. SPX was seriously down at the open, but bounced off the 200 dma and recovered to be in positive territory briefly before selling off in the afternoon. Trading volume was up again with 3.5 billion shares of the S&P 500 trading. Trading volume was up 15% on the NYSE and up 10% on NASDAQ. The VIX closed at 25.3%, up again today. It is interesting to note that the 200 dma held when the market corrected in mid June. Will it serve as support again? The 200 day moving average of the SPX stands at $1285. It is worthwhile to keep an eye on that line in the sand.

My puts remain from the Aug iron condor on RUT, and so far, are OK with a delta of 5 on the short $680 puts. The Sept condor now sits perfectly delta neutral at delta = +$7 and theta = +$75. But the rising IV has taken its toll, forcing the P/L back to break-even. But remember: the ultimate profitability has not changed; if we are forced to close the put spreads prematurely, the increased IV will hurt us, but if we stay in the position to expiration, our full profit is still feasible.

So your assignment for the weekend is clear: postpone any more market worries until Monday morning and enjoy your family and friends. Remember what is truly important.

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Written by Dr. Duke

Created: 28 July 2011

 Markets tried to add some small gains today, but were pulled back this afternoon to modest losses. SPX closed at $1301, down $4 while RUT closed down $1 at $799. RUT ran as high as $810 before being pulled back down. Trading volume on the S&P 500 dropped a bit from yesterday but remains above average at 3.3 billion shares.

Initial unemployment claims dropped to 398k, down from last week's 422k. Continuing claims dropped by 17 thousand but remain around 3.7 million. Pending home sales rose 2.4% in June, but this was down from last month.

My Aug condor consists only of 20 contracts of the 670/680 puts with delta = +$24 and theta = +$82; the delta of the 680 puts = 5. The Sept iron condor on RUT stands at a P/L of +$100 with delta = -$6 and theta = +$73. Since I don't expect much progress on the debt ceiling issue, I suspect we have more of this dismal sideways to downward action in front of us for a while.

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Written by Dr. Duke

Created: 27 July 2011

 Traders came near to panic selling, especially in the last hour of trading today. SPX sliced down through its 50 day moving average on increased volume - not a good sign. SPX closed at $1303, down $28. RUT lost $24 to close at $801. Over 3.5 billion shares of the S&P 500 traded today. We haven't seen that level too often this year and only a handful of times this summer. It seems the durable goods orders declining 2.1% in June after a 2% increase in May was discouraging to traders, and the Fed Beige Book just reinforced the fact that the economic recovery is slow at best. Then one has only to add on the breathless media attention to the debt squabbles to see why some traders are starting to run for cover.

I took today's downturn as an opportunity to close the 890/900 call spreads in my Aug RUT iron condor. The remaining 670/680 put spreads are about three standard deviations OTM, but it wouldn't take many days like today to start to be a problem for those spreads. The Sept RUT condor stands at a P/L of +$200 with delta = -$3 and theta = +$67. The Greeks reaffirm that this position is now very well centered on the index, but the spike upward of IV today weighed on my condors (VIX jumped to 23%). Days like today remind us to stay calm and just follow our trading systems; even when everyone (especially on CNBC) appears to be in a panic, stay calm and follow your rules.

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Written by Dr. Duke

Created: 26 July 2011

The markets continue to trade largely sideways and maybe slightly downward as everyone is focused on the inept people who run our government. The real tragedy is that we can no longer trust anyone in politics; they spin the truth so as to suit their objectives. This is also true of corporate management in general. In this age of political correctness, the end justifies the means.

The VIX closed at 20% today - not terribly high if there was much real fear in the markets. But I think the uncertainty is sufficient to keep the big players on the sidelines until they see some clearer picture of the future. SPX spent most of the day trading sideways in choppy fashion, and then sold off a bit at the close at $1332, down $5. RUT lost $7 to close at $825. Trading volume was up from yesterday, with 2.8 billion shares of the S&P 500 trading; this is right at the 50 dma. Trading volume on the NYSE was down 9% and was also down 9% on NASDAQ.

The Case Schiller housing price index declined 4.5% in May but the consumer confidence index moved up slightly to 59.5 for June from 57.6 in May. New home sales came in at 312 thousand for June, essentially unchanged form the the previous month.

My Aug iron condor on RUT has a current P/L of +$2,102 with delta = -$23 and theta = +$74. My Sept iron condor stands at break-even with delta = -$47 and theta = +$71. The dithering is good for us delta neutral traders.

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Written by Dr. Duke

Created: 25 July 2011

The markets opened in negative territory and recovered somewhat, but weakened toward the end of the day and all of the major indexes closed with small losses for the session. SPX closed down $8 at $1337 and RUT lost $10 to close at $831. Trading volume dropped from Friday with 2.4 billion shares of the S&P 500 trading today. Trading volume rose 4% on the NYSE and dropped 3% on NASDAQ.

There wasn't any new economic data today, so all of the CNBC talking heads were focused on the debt ceiling negotiations. As they breathlessly talked about the end of the world as we know it, if we don't have a deal by August 2, I couldn't help remember the old story of Chicken Little crying that the sky was falling. Anytime a guest suggested this was a bit overdone, the hosts would leap on him as though he was an irresponsible nut. However, all one has to do is look at the bond markets - they aren't concerned; why do you suppose that market would be calm if the end is so near? One factual tidbit to feed the debate: only 12% of federal revenue to used to service the debt. If it only took 12% of your pay check to pay your mortgage, do you think the bank would worry about you defaulting? So why all the talk about the U.S. defaulting on its debt? The answer is politics and the talking heads love to drum up suspense and hysteria.

In the meantime, my Aug condor on RUT stands at a P/L of +$1,322 with a position delta of -$55 and theta of +$119 on 20 contracts. The Sept condor stands at a P/L of -$800 with a position delta of -$61 and theta of +$82. Both of these positions have plenty of safety margin to the downside, so we are in good shape to navigate these volatile markets. Don't panic; stay calm and wait for the high probability trade.

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Written by Dr. Duke

Created: 22 July 2011

Yesterday's big gains were on very high trading volumes, a big change from the recent pattern of persistent low volume days. But it appears like all of those traders went home yesterday and didn't come back. SPX dropped down this morning, recovered, and then spent the day trading largely sideways, closing up $1 at $1345. RUT also gained less than a dollar to close at $842. Only 2.5 billion shares of the S&P 500 stocks traded today, significantly down from yesterday's 3.7 billion shares. Trading was down 25% on the NYSE and was down 30% on NASDAQ.

No significant economic reports came out today and the market seemed to reflect that lack of news.

My Aug condor on RUT stands at a P/L of +$1,062 with delta = -$83 and theta = +$91. I opened my Sept RUT condor at 670/680 and 900/910 earlier this week; it stands at a P/L of -$700 with delta = -$78 and theta = +$61.

Have a great weekend!

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Written by Dr. Duke

Created: 20 July 2011

The futures were in positive territory this morning, but trading stalled shortly after the open and the markets just traded sideways all day. SPX closed down $1 at $1326 while RUT traded down $2 to close at $832.  Trading volume pulled back from yesterday with 2.7 billion shares of the S&P 500 stocks trading today. Trading volume was down 7% on the NYSE and was down 1% on NASDAQ.

The only significant economic news today was existing home sales coming in at 4.77M in June, essentially unchanged when compared to May's 4.81M.

My Aug iron condor on RUT stands at a P/L of +$1,282 with delta = -$65 and theta = +$89. Since the 670/680 put spreads are so far OTM, the theta/delta ratio is a bit skewed for this position. The delta of the 890 calls is only 9, so the position is reasonably safe for the time being - but who knows what tomorrow will bring?

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Written by Dr. Duke

Created: 19 July 2011

One of my favorite magazines growing up was Mad Magazine and "What, me worry?" was the tag line for the satirical magazine. Now some of you are applauding my choice of that magazine and some are thinking you now understand why I need professional help - it was that kind of magazine; you either loved it or hated it.

The markets opened up in positive territory today and then moved even higher after some encouraging news from the discussions (too polite a word) in Washington concerning the debt ceiling. SPX gained $21 to close at $1327 while RUT closed at $835, up $19. But today's strong surge seemed surprising after so many days of pessimism and disaster scenarios being played out by all of the Chicken Littles on CNBC. The same very real and very serious issues remain, but we traded higher - happy days are here again. Trading volume bounced up as well with 3 billion shares of the S&P 500 trading; the 50 dma = 2.8B. Volume was up 7% on NASDAQ but flat on the NYSE.

After hours, AAPL is trading around $400 after another stellar quarter. The Jan 2012 350/400/450 butterfly we have in our trading group will get a nice boost tomorrow, but this move came too soon. If AAPL continues on upward, we will have to close this trade early. That is the problem with options trading; you have to predict the price and the timing of the move. I thought $400 was a reasonable target for year-end. But what am I complaining about - we are making money.

My Aug iron condor on RUT stands at a P/L of +$862 with a position delta of -$65 and position theta of +$110. So now it will be interesting to see how long we can go without the malaise of Euro zone debt, unemployment, etc. catching up with us again.

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Written by Dr. Duke

Created: 18 July 2011

The mood on Wall Street continues to be rather pessimistic with everyone focused on disaster scenarios such as a Euro zone default bringing down the global economy or Washington gridlock leading to the U.S. defaulting on its debt (this scenario is being told largely as a negotiating tactic - in reality, it is highly unlikely). The earnings reports so far have been pretty good but that hasn't affected trading outside of the particular stocks reporting. SPX closed down $11 at $1305 and RUT lost $13 to close at $816. Markets were down even more in early trading but recovered somewhat through the day. Outside of gold and AAPL, the screens were largely red. AAPL set a new all time high at $374 in advance of its earnings announcement tomorrow evening. But trading volume was down from Friday with 2.8 billion shares of the S&P 500 trading (right at the 50 dma). Trading volume on the NYSE was down 19% and trading was down 3% on NASDAQ.

My August iron condor on RUT continues to plug along, now at a net P/L of +$1,802 and delta = -$9 and theta = +$66. The pull back of the past week or so has actually pulled this condor back to a nice delta neutral position. The AAPL Jan 2012 butterfly recommended in my trading group a few weeks ago is doing well with AAPL's run upward; this position is already up 36%.

Today I opened a new section in the free Downloads area of this web site. I invite any of my blog readers to contribute any file that might be of interest to your fellow traders. The first entry is an article from one of my clients describing his journey learning to trade. If you have spreadsheets that you have found useful in your trading or anything else you would like to share, just send it to me with a note describing it and I will upload it to the web site.

Are you positioning yourself for Apple's earnings announcement? It should be interesting...

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Written by Dr. Duke

Created: 15 July 2011

The news is filled with negativity: European debt woes, raucous debt negotiations in Washington, persistent unemployment.  But so far in this earnings season, corporate balance sheets look pretty good. What is a trader to do? Today's trading seemed to reflect that indecision today, chopping back and forth all day; but the bulls took a run at it during the last hour and managed to close the day with positive results on all of the major indexes. It appears this market's bias is to the upside. A resolution to the debt negotiations in DC could be the trigger.

The market's mood wasn't helped with a negative Empire manufacturing survey result and a large decline in the Michigan Consumer Sentiment survey from last month's 71.5 to 63.8 for July. And the uncertainty surrounding the continued deadlock in Washington is weighing on the market.

My Aug iron condor on RUT at 670/680 and 890/900 stands at a P/L of +$962 with a position delta of -$64 and theta = +$88. The July condor's put spreads expire worthless this weekend.

Have a great weekend.