Dr. Duke's Blog

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Written by Dr. Duke

Created: 19 April 2011

Traders opened the markets this morning in slightly positive territory and expanded the gains in the afternoon to basically return to where we started Monday morning before the S&P debt warning scared traders. SPX closed up $7 at $1313, the same as yesterday's opening price. RUT closed up $2 at $823. Trading volume declined from yesterday with 3.1 billion shares of the S&P 500 stocks trading; the 50 dma = 3.3B. Trading volume on the NYSE was down 20% and was down 7% on NASDAQ. Gold traded above $1500 for the first time today as traders continue to seek refuge from sovereign debt  and global unrest. S&P's warning shot yesterday probably fueled this move to gold, but equity traders were unpersuaded.

Housing starts came in at an annualized number of 549k for March and housing permits came in at 594k; both figures were better than analysts expected.

My May iron condor on RUT is positioned at 720/730, 890/900, and 920/930 and continues to build gains with a P/L of +$612 and delta = +$10 and theta = +$46. This is a slow economic news week, so the markets will primarily be driven by earnings announcements. One of the biggest to watch will be Apple Computer, after the close tomorrow.

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Written by Dr. Duke

Created: 18 April 2011

Standard and Poors warned that it may be forced to downgrade US debt at some point in the future and changed its outlook on US debt from"stable" to "negative". This drove markets down sharply at the open this morning, but SPX bounced at $1295 about 11 am ET and began to recover some of its losses throughout the day. SPX closed at $1305, down $15. RUT lost $13 to close at $822. In my opinion, traders realized that nothing really had changed and started picking up some bargains in the market. After all, who is surprised that the US has a debt/spending problem? Trading volume was modestly higher with 3.6 billion shares of the S&P 500 stocks changing hands. Trading on the NYSE was up 4% and was up 1% on NASDAQ.

Today's move down was helpful for my May iron condor position; it has moved into the black with a P/L of +$362, delta = +$8, and theta = +$53.

One has to be impressed with the resilience of this market; we keep having a variety of news shocks take the market down and get the bears excited. But it has been well contained in every case. Trading volume has remained fairly low with the large institutions remaining on the sidelines. The continuation of the bull market trend may be in doubt, but the much anticipated emergence of a bearish trend has not developed. But my iron condors don't depend on my market predictions. I find it easier to trade what the market gives me.

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Written by Dr. Duke

Created: 15 April 2011

Several positive economic reports drove markets higher at the open this morning and resulted in higher closes on all of the major market indexes. SPX closed up $5 at $1320 and RUT gained $8 to close at $835. The CPI rose 0.5% in March, matching February's rise and calming some inflation fears by those who expected an even higher rise. The New York Empire Manufacturing Survey reported 21.5 for April, up from March's 17.5. The University of Michigan Consumer Sentiment Survey reported a value of 69.6 for April, up from 67.5. And industrial production increased 0.8% in March - all in all, a pretty positive set of reports.

My May iron condor on RUT stands at roughly break-even with a position delta = -$16 and theta = +$68. With 34 days to expiration and our short options with deltas of 5 to 8, we are well positioned. Decreasing volatility is also helping this position.

Have a great weekend!

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Written by Dr. Duke

Created: 14 April 2011

A surprising jump in unemployment claims took the market down sharply at the open this morning, but it steadily erased most of the losses by the close of trading. SPX closed unchanged at $1315 while RUT resumed its hard charging ways by gaining $4 to close at $827. Trading volume was flat with three billion shares of the S&P 500 trading today. Trading volume was down 2% on the NYSE and down 2% on NASDAQ. Members of the FOMC reaffirmed their plans to continue quantitative easing; many have been criticizing their "easy money" approach in light of increasing food and fuel costs; but the Fed sees lagging job growth and is willing to risk inflation to reboot the economy.

Initial unemployment claims jumped to 412 thousand, an increase of 27k from last week. Continuing unemployment claims dropped 58k to 3.68 million. The PPI increased 0.7% in March, fueling debate about inflation and Fed policy.

My May iron condor on RUT moved slightly into the black (+$62) with a position delta of -$6 and position theta = +$58. The 720/730 put spreads are nearly two standard deviations OTM while the 890/900 call spreads are over one standard deviation OTM and the 920/930 call spreads are nearing two standard deviations OTM.

Now we return to trying to predict this market - it seems the bears and the bulls are pretty evenly matched at this point. And trading volume appears to suggest most big players are sitting on the sidelines watching the struggle. Of course, the beauty of our delta neutral trades is that we don't need to predict what is coming.

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Written by Dr. Duke

Created: 13 April 2011

The markets traded largely sideways today after opening positively this morning, but then slowly weakening. SPX closed unchanged at $1314 while the RUT tacked on $2 to close at $824. SPX remains right at its 50 dma; RUT bounced off the 50 dma this morning and then closed higher. Trading volume was flat to down with 2.9 billion shares of the S&P 500 trading; this remains below the 50 day moving average at 3.3B. The Fed released the Beige Book this afternoon and that may have helped perk up the market a bit with some evidence of continued economic recovery.

My May iron condor on RUT stands at a P/L of -$498 and delta = -$0.7 and theta = +$76. The remnants of our April condor will expire worthless this weekend and then we will start to look at establishing the June condor position next week.

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Written by Dr. Duke

Created: 12 April 2011

Trading opened in the red today and slid further as the day wore on. Alcoa's miss on revenues was taken as a negative commentary on the economy even though Alcoa beat earnings estimates. Oil prices dropped to $106/bbl after being as high as $113/bbl yesterday; this move took the energy stocks down but did nothing to help the overall market. SPX closed at $1314, down $10 and RUT lost $12 to close at $822. So RUT continues to beat SPX on the way down, just as it did on the way up. SPX dropped through the 50 dma at $1315 to $1310 before bouncing back to close at $1314, essentially at the 50 dma. RUT sliced through support at $830 and never looked back. RUT's next solid support level is at $808-$810. Trading volume was mixed, but generally up with 3.2 billion shares of the S&P 500 trading, just shy of the 50 dma at 3.3B; trading volume was up 17% on the NYSE, but down 82% on NASDAQ (due primarily to yesterday's unusually high trading volume on NASDAQ).

My May iron condor on RUT is back to a perfectly delta neutral position with a P/L of -$868, delta = $0.1 and theta = +$77. I have rarely had a position so delta neutral this far into the trade. Delta of the $890 calls has returned to 8. We still have a maximum potential profit of $1,442 after all of the adjustments we have made to stay in the position. Our put spreads at 720/730 remain almost two standard deviations OTM and the 890/900 call spreads are about 1.2 standard deviations OTM. So this position is in pretty good shape with 37 days remaining.

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Written by Dr. Duke

Created: 11 April 2011

The markets slowly traded downward as the day wore on, but most traders were watching from the sidelines. SPX closed at $1324, down $4 and RUT has lost its supremacy, closing down $7 at $834. RUT has now traded below its 2011 high set in mid-February; the next support level is $830. Significantly, trading volume in the S&P 500 hit its lowest level of 2011 at 2.4 billion shares. Trading was down 1% on the NYSE but was up 28% on NASDAQ. After the bell, Alcoa beat earnings estimates but disappointed on revenues; we'll see if that sets the tone for tomorrow's trading.

I removed the hedge on my RUT May iron condor position today. That leaves me with a P/L of - $1,318 and delta = -$34 and theta = +$94. The theta/delta ratio of about three-to-one is excellent. If RUT continues roughly sideways to down for a few weeks (38 days left), we will salvage a profit from this position. That is the advantage of a hedging adjustment rather than closing spreads as the index moves against the position. We remain in the position with an opportunity to close for a gain for the month.

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Written by Dr. Duke

Created: 08 April 2011

The markets traded sideways all morning and then slowly lost steam in the afternoon. Buying in the last hour of trading recovered much of the earlier losses. SPX closed at $1328, down $5. Unlike the past several sessions, RUT fared worse than SPX, losing $9 to close at $841. The absence of economic data or earnings announcements seemed to leave traders without much incentive to trade. Trading volume matched recent lows with 2.7 billion shares of the S&P 500 trading today. Trading volume dropped 8% on the NYSE and dropped 9% on NASDAQ.

The pull back in RUT took much of the pressure off of my May iron condor but I am waiting until Monday to see if it makes sense to remove my hedges. I have been burned before removing hedges too quickly. Small losses on hedge options are like the insurance premiums on your house. Even if my house didn't burn down, I don't feel badly having paid the insurance premium. The P/L stands at -$1,650 with delta = +$15 and theta = +$56. So our price risk is minimized and yet theta is still reasonably large.

Have a great weekend.

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Written by Dr. Duke

Created: 07 April 2011

The new Japanese earthquakes sent some fear through the markets today. Although the markets opened reasonably positively, they never recovered from this news. SPX closed down $2 at $1336 and RUT closed at $849, down $5. Trading volume was flat to down with 3.1 billion shares of the S&P 500 trading. The NYSE saw trading volume increase slightly by 2% but volume dropped on NASDAQ by 11%. Initial unemployment claims were essentially flat once again at 382k, down 10k. Continuing unemployment claims came in at 3.7 million, down nine thousand.

One has to be impressed by the resilience of this market; the bears seem unable to get anything going to the downside regardless of the news or economic data. But similarly, the bulls are having difficulty hitting new highs and firmly resuming the bullish uptrend. The only exception has been the Russell 2000 Index (RUT); some analysts believe traders are seeking safety from global unrest in domestic mid-cap stocks and driving this index higher. RUT has set six new 52 week highs over the past seven sessions.

My May condor on RUT is essentially unchanged with a P/L at -$1,630 with position delta = +$6 and theta = +$54. If we were to close our call hedges today, we would have about $2,300 in potential gains remaining in this position. That is the power of this type of hedging adjustment; if the market slows or pulls back, we can salvage a large portion of our position's profits. But if the market doesn't pull back, we have minimized our losses. Delta neutral trading isn't feasible without these adjustment techniques.

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Written by Dr. Duke

Created: 06 April 2011

The markets appear to be a nearly balanced tug of war these days between the bulls and the bears. The bulls seem to have the edge, but just barely. As oil nearly hit $109/bbl and gold hit a new high at $1467, the markets oscillated sideways and slightly higher. SPX closed up $3 at $1336 while RUT set a new 52 week high at $854, up $1. But SPX has yet to break through its high of $1343 set in February. In fact, the last three trading sessions on SPX have displayed various versions of the doji candlestick - the classic sign of indecision; neither the bulls nor the bears can quite take control.Trading volume continues at fairly muted levels. 3.1 billion shares of the SPX traded today, up a bit from yesterday but still below the 50 dma. Trading volume rose 4% on the NYSE and was up 3% on NASDAQ.

My May iron condor on RUT is cruising along pretty much unchanged with a P/L of -$1,401 and delta = -$2 and theta = +$37. Our adjustments are holding our losses to a reasonable level while we give the market some time to trade sideways or even pull back a bit. The delta of our $890 calls dropped to 26. At times in the market like these, I appreciate my delta neutral positions; I don't find myself worrying about them as much as my directional trades. Unemployment claims will report tomorrow; we'll see if that tips the scale one way or the other.