Dr. Duke's Blog

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Written by Dr. Duke

Created: 23 May 2011

Some preliminary data from Europe and China suggest those economies may be slowing. When you add the European sovereign debt concerns, you get a market full of worries and understandably cautious about buying. These concerns also drove the dollar higher and this traditionally pulls the stock markets downward. The markets gapped down at the open and traded sideways from there. The major indexes closed off their lows for the day, but not by much. SPX dropped $16 to close at $1317 and RUT closed at $814, down $15. Trading volume was down; only 2.5 billion shares of the S&P 500 traded today, well below the 50 dma. Trading on the NYSE was down 14% and trading volume on the NASDAQ was up 1%.

If one draws the trend lines on the SPX chart for the down trend since May 2, today's action puts us either on or very close to that lower trend line. So we appear to be at the tipping point. If the broad markets dive lower tomorrow, we may be defining a new bearish trend lower. On the other hand, we will need some significant upward movement to decisively break-out of this downward trend. On SPX, this will require a close above $1345, $28 higher.

All of the May options expired worthless. My June RUT condor stands at a P/L of +$2,056 with delta = $0.50 and theta = +$54. I believe this theta/delta ratio sets a personal high - I have never had a position delta so close to zero. So now I watch to see if this market is headed lower, or will we just muddle sideways?

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Written by Dr. Duke

Created: 20 May 2011

The dollar's strength, coupled with concerns about European debt, held the equity markets down today. SPX traded down $10 to close at $1333 and RUT traded down $6 to $829. The SPX settled at $1342.55 for May options and RUT settled at $831.14. Thus, the remaining 720/730 and 920/930 May RUT spreads from my condor have officially expired worthless. So the May position closed with a 7% gain and my condor trading is up 19% for the year; by comparison, SPX is up about 5%.

One can read the SPX price chart in two somewhat different ways. One would be to identify the trading range of $1320 to $1370 that SPX seems to be trapped in for the past month or so. An alternative view would draw trend lines along the tops and bottoms of the bars since May 1 and propose a new downward trend. A trader with the first perspective would be looking for a break-out either above $1370 or below $1320 to define a new trend to trade. The latter perspective would be looking for a break-out above $1345 to resume the bullish trend.

My June iron condor on RUT stands at a P/L of +$1,716 with delta = -$17 and theta = +$75.

Have a great weekend. It is finally warm in Chicago!

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Written by Dr. Duke

Created: 18 May 2011

The markets opened up positively this morning and steadily climbed all day, closing near session highs. SPX tacked on $12 to close at $1341. Not to be outdone,  RUT gained $13 to close at $833. Volume continues to be rather low. Today's strong run involved 2.8 billion shares of the S&P 500 stocks, down from yesterday and still below the 50 dma. Trading volume was down 10% on the NYSE and was down 15% on NASDAQ. The FOMC minutes were released this afternoon, but didn't really offer any new insights to the committee's thinking. No other economic news of any import was released today.

My June iron condor on RUT stands at a P/L of +$1,956 with position delta = -$31 and theta = +$47.

I have had an interesting trade on AAPL during this past few weeks of a disappointing price chart from AAPL. In February, with AAPL at $355, I bought 5 contracts of the AAPL Jan 12 $350 calls. I later sold the Feb $360 calls against the position, then I rolled those out to March and the Mar $360 calls expired worthless. Then I sold the April $340 calls and rolled those to May $340. Now the cost basis of my LEAPS is $10.15 (assuming the May $340 calls expire worthless). Depending on the price action the next couple of days, I may roll the May calls out to June. If I assume the May calls expire worthless, then the Jan 2012 $350 calls could be sold for a 43% gain, whereas if I had bought AAPL stock, I would be down about 5% and if I had just held the LEAPS, I would be down 34% (ouch!). This illustrates the leverage (both ways) when using LEAPS for your long term bullish plays, but perhaps more importantly, the power of selling calls against that position during times of weakness.

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Written by Dr. Duke

Created: 17 May 2011

The markets opened lower this morning and traded downward until around noon and then the bulls woke up and started buying, taking the markets back near the opening levels. SPX sliced through the 50 dma and dipped as low as $1319 before rebounding to close unchanged at $1329. RUT traded down and bounced off support at $815, closing down $3 at $820. All of this action occurred on higher trading volume levels with the S&P 500 stocks trading 3.1 billion shares, just below the 50 dma at 3.2B. Trading on the NYSE was up 10% and up 7% on NASDAQ. Many technical indicators are nearing oversold conditions, but the current bias appears to be downward. However, the fact that today's strong downward move didn't turn into a very ugly day has to be encouraging. Perhaps we have just expanded the lower band of our trading range?

Lower housing starts were reported for April (523k, down from 585k) and fewer building permits were issued in April (551k vs. 574k in March). Industrial production was flat for April, down from a 0.7% increase in March. Capacity utilization was almost flat at 76.9% in April vs. 77% in March. This economic data may have contributed to the weakness in the markets this morning.  Some analysts believe the weakening of the dollar later in the day contributed to the market's rebound. But we may be reading tea leaves here, hoping to feel more confident that we have found the cause and effect relationship.

My June RUT iron condor at 690/700 and 900/910 stands at a P/L of +$1,716 with delta = -$14 and theta = +$60. This position remains delta neutral with a fair amount of safety margin to the upside (about 1.5 standard deviations) and a large amount of room on the downside (about 2.5 standard deviations). All in all, this is a difficult market to be trading now - unless you are delta neutral. But even then, the volatility can be a bit unnerving.

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Written by Dr. Duke

Created: 16 May 2011

The equity markets sold off pretty strongly today, led by tech stocks. SPX closed down $8 at $1329, right at its support level at about $1330 - $1335, set in early April and mid-May. An open tomorrow farther down may be a very bearish sign for this market. RUT closed at $823, down $13. RUT is in a similar position as SPX on its chart having closed just below the lows set in early May and approaching the $815 low of mid-April. As in previous down sessions, trading volume remains anemic with 2.7 billion shares of the S&P 500 stocks. Trading on the NYSE was up 1% and was up 7% on NASDAQ. So we have traded to the bottom of the trading range; which way will it tip?

The NY Fed Empire Manufacturing Index plummeted to 11.9 for May from last month's 21.7. Otherwise, there were minimal economic data reports today.

My June iron condor on RUT stands at a P/L of +$1,276 with a position delta = -$9 and theta = +$84. This condor is well positioned as the market sits at this tipping point; the puts spreads are way down at 690/700. The 900/910 call spreads are now about 1.5 standard deviations OTM. So we watch to see if the bullish trend resumes or the correction deepens, but our condor is in good shape.

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Written by Dr. Duke

Created: 13 May 2011

The markets opened basically flat this morning but quickly turned south when the dollar strengthened. SPX lost $11 to close at $1338 while RUT dropped $12 to close at $836. Trading volume was down across the board with 2.8 billion shares of the S&P 500 trading.Volume dropped 6% on the NYSE and dropped 13% on NASDAQ. The CPI increased 0.4%, in line with analysts' estimates. The University of Michigan Consumer Sentiment Survey reported an increase to 72.4 in May from April's 69.8. But traders seemed to ignore this economic data and just took their money off the table. Although the low volume suggests the institutions are largely sitting on the sidelines.

I applied my "Two Sigma" rule to the remaining spreads in my May iron condor on RUT. The 920/930 call spreads are over three standard deviations OTM while the 720/730 put spreads are over four standard deviations OTM. So I will allow both spreads to expire worthless and book an 8% gain for May. This brings the recommendations of the Flying With The Condor™service to a 19% gain for this year, handily beating the S&P 500 which is up a little over 6%. The June iron condor on RUT stands at a P/L of +$756 with position delta = -$53 and position theta = +$92.

Have a good weekend.

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Written by Dr. Duke

Created: 12 May 2011

The markets were weighed down at the open this morning by lower markets overseas as well as a stronger US dollar. But then the dollar turned over and the stock markets revived. SPX gained $7 to close at $1349 while RUT also gained $7 to close at $847. Trading volume was flat with three billion shares of the S&P 500 trading; volume was down 2% on the NYSE and down 1% on NASDAQ. Initial unemployment claims were reported as 434k this week, greater than expected, but down from last week. Continuing unemployment claims were flat at 3.8 billion. The Producer Price Index (PPI) increased 0.8%, a little higher than the 0.5% increase predicted by analysts.

My May iron condor on RUT is near its maximum profit with delta = +$2 and theta = +$63. Unless something dramatic happens, I will allow both the 920/930 call spreads and the 720/730 put spreads to expire worthless. The June iron condor on RUT stands at a P/L of -$44 with delta = -$79 and theta = +$103.

So now we watch to see if this market can sustain a trend one way or the other. It seems we have the Fed's QE II and a series of strong earnings reports pushing the markets upward, but many economic headwinds holding the markets down. For now, the tug of war is a dead heat.

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Written by Dr. Duke

Created: 11 May 2011

The dollar rebounded today, pressuring the stock markets. SPX lost $15 to close at $1342. RUT again was more volatile than SPX, closing at $841, down $15 (greater percentage drop than SPX). Trading volume bumped up a bit at 3.0 billion shares of the S&P 500, but this remains below the 50 dma. Trading on the NYSE was up 16% and was up 12% on NASDAQ. The markets appear to be trapped in a trading range. The key levels to watch on SPX are $1330 on the downside and $1370 on the top side. If SPX breaks $1330 going down, we may see some real damage. However, if SPX can break-out above the previous high at $1370, the bulls may be off to the races again.

My May condor is coasting to the finish line with the remaining spreads at 920/930 and 720/730 likely to expire worthless. Both spreads are far OTM (greater than two to three standard deviations). The June iron condor on RUT stands at a P/L of +$136 with delta = -$56 and theta = +$107. The markets' indecision has been good to my condors. Tomorrow will feature the unemployment claims report and the PPI. A sizable increase in PPI could spook the markets. Many analysts are concerned about rising inflation and a big increase in PPI could cause some selling. Fortunately, my June put spreads are down at 690/700 on RUT - that should be safe (he said as the ice berg looms ahead).

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Written by Dr. Duke

Created: 10 May 2011

The markets opened up strongly this morning, but even more impressively, the bulls added a few points in the last couple of hours of trading. The SPX is nearing its recent 52 week high at $1365; SPX closed today at $1357, up $11. RUT has also retaken its role as market leader, tacking on $13 to close at $856. Trading volume was up from yesterday's abysmal showing, but still remains at historic lows with 2.6 billion shares of the S&P 500 trading, well below the 50 dma. Trading volume was up 8% on the NYSE and up 23% on NASDAQ. The VIX pulled back under 16%.

Economic data was almost non-existent but wholesale inventories reported up 1.1% in March. That is a bullish sign for the economic recovery; it suggests businesses are forecasting increased demand. If we saw inventories building during a booming economy, that would suggest a slowing of demand.

My May RUT iron condor stands at a P/L of +$1,142 with position delta = +$2 and theta = +$48. The June condor is feeling the pressure of this most recent bullish run upward with a P/L of -$784 and delta = -$103 and theta = +$102. The delta of the 900 call is at 17 and the theta/delta ratio being approximately one to one shows the strain on the position. I will have to adjust soon. So my delta neutral positions are under stress and my bullish directional trades are happy as clams (I don't personally know any clams, but...).

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Written by Dr. Duke

Created: 09 May 2011

The stock markets opened flat this morning and traded sideways until around noon when the dollar declined and stocks rose. The markets held those gains into the close. An absence of economic data appeared to cause many to stay on the sidelines. Trading volume was way off from Friday with only 2.2 billion shares of the S&P 500 changing hands. That was the lowest trading volume for the S&P 500 recorded in 2011. Trading volume was down 25% on the NYSE and down 19% on NASDAQ. The SPX closed up $6 at $1346 while RUT closed at $843, up $9. Economic data will continue to be in short supply until Thursday when unemployment claims and the PPI will be reported. That will be followed by the CPI and the University of Michigan Consumer Sentiment survey results on Friday.

I closed the remaining 890/900 call spreads in my May condor on RUT today. This position now consists of ten contracts of the 920/930 calls and twenty contracts of the 720/730 put spreads. At this point, it appears likely I will allow the remaining spreads to expire worthless. The current position is up about $1,100 with delta = -$1 and theta = +$21. If the remaining spreads expire worthless, the May condor will gain $1,272 or 7% on capital at risk. The Jun iron condor on RUT stands at a P/L of +$316 with delta = -$61 and theta = +$90. So we continue to trade what the market gives us while others attempt to predict the future...