Dr. Duke's Blog

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Written by Dr. Duke

Created: 05 April 2011

The markets traded up this morning, but turned over about 1 pm ET and headed south. SPX closed unchanged at $1333, but RUT continues to set new highs with a $4 gain today to close at $853. Trading volume was mixed. Only 2.6 billion shares of the S&P 500 traded, up slightly from yesterday but well under the 50 dma at 3.4B. Trading volume was up 8% on the NYSE and also up 15% on NASDAQ. The only economic data reported today was the ISM Services Index for March at 57.3, down from last month's 59.7. The minutes from the last FOMC meeting came out today, but didn't seem to have much impact on the market (the broad decline began about an hour before the release of the minutes).

AAPL slid in early trading because its weight in the NASDAQ 100 Index (NDX) is being reduced in the latest rebalancing, but it recovered most of the decline before the close. GOOG took it on the chin due to rumors of an upcoming FTC investigation.

Given RUT's steady rise, I decided to apply additional adjustments today to the May iron condor on RUT. I rolled some of my 890/900 call spreads up to 920/930. This improved the Greeks of the position markedly with position delta = +$4 and theta = +$45.  Many iron condor traders use the position delta as the trigger for their adjustments. For example, if your position delta = -$100 and RUT runs up $6 tomorrow, that will translate into a loss of $600 on the position, assuming other factors are constant, which they aren't. But it gives us an idea of our position's risk due to price movement. My objective with the adjustments is to keep delta at levels consistent with my risk tolerance while theta remains large and positive.

I wonder what surprises this market will bring tomorrow? It is interesting that RUT is setting new highs every day and SPX has yet to break the highs it set back in February. Many technical traders are starting to worry that a classic double top is being formed by SPX (a bearish reversal). But this market has proven difficult to predict.

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Written by Dr. Duke

Created: 04 April 2011

The markets opened up a bit this morning but then traded sideways and downward for the balance of the day. The last hour of trading saw a resurgence of buying that brought the averages back near their starting points. SPX closed unchanged at $1333 but RUT set a new high at $849, up $3. Trading volume was way down with 2.5 billion shares of the S&P 500 stocks trading today. Today's trading volume, together with trading on March 28, are the lowest trading levels this year. Today was a slow day for economic news and that may have contributed to the sluggish markets. The VIX increased a bit to close at 17.5%. I have seen several reports of money is flowing into equities, but we have had very few strong volume days; a lot of funds must be carrying large cash balances. At best, this is a nervous bull market; at worst, it is a market on the edge of reversal.

The adjustments on my May iron condor on RUT are working well, holding our losses to a minimum while we wait out this market. Our position now stands at a P/L of - $580, delta = -$16 and theta = +$41. We will eventually be forced to either roll our call spreads upward or remove our hedge positions. But, in the meantime, we are buying time to see which trend develops.

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Written by Dr. Duke

Created: 01 April 2011

The markets liked what they read in the jobs report this morning and traded up strongly through most of the day. But the major indexes gave back much of their gains in the last hour or so of trading. SPX closed at $1332, up $7 after trading as high as $1338 earlier in the day. RUT set another 52 week high at $847, up $3, after trading as high as $851. Trading volume was flat to down with three billion shares of the S&P 500 trading, well below the 50 dma. Trading volume was down 7% on the NYSE and up 11% on NASDAQ.

216k new jobs were added in March according to the US Nonfarm Payroll Report; this was up from the 194k reported for February. The unemployment rate dropped 0.1% to 8.8%. The ISM index reported out essentially unchanged for March at 61.2 (61.4 last month).

Two things concern me about this market: 1) the fact that the bulls could not hold the highs today, and 2) the continued anemic trading volume. I have to continue to play what the market gives me, but this market seems weak, even as it makes new highs.

I closed the call spreads of my Apr iron condor on RUT today during the late afternoon sell-off. Assuming the Apr 700/710 put spreads expire worthless (that appears to be a safe bet), we will book a gain of $2,220 on 20 contracts or 13% on the capital at risk. This week, I became concerned that this market might just continue to climb upward and having two weeks left until April expiration, I decided it was prudent to close this condor early while we could confirm 93% of the maximum potential gain of $2,400.

The May condor is standing essentially unchanged at a P/L of -$1,240 with delta = -$22 and theta = +$54. The Jun $880 calls are doing their job, hedging our losses and buying us time for the market to pull back. If the market continues higher and forces me to roll the call spread upward, those June calls will continue to reduce our losses. The trick to managing iron condors is not making money every month because you have placed the spreads so far OTM; it is minimizing the losses when they come. Because they will come.

Have a great weekend.

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Written by Dr. Duke

Created: 31 March 2011

The markets were very choppy today, trading sideways with modest volume. The major indexes ended the day in mixed fashion. SPX lost $2 to close at $1326 while the RUT set a new 52 week high at $844, up $3. RUT is nearing the highs of 2007 at around $860. SPX appears to be struggling to break through the resistance around $1330 set in early March as the correction began. Trading volume was modest with 3.0 billion shares of the S&P 500 trading, but this is still well below the 50 dma at 3.5B. Trading volume rose 6% on the NYSE and increased 4% on NASDAQ.

Initial unemployment claims were essentially unchanged this week at 388k (down 6k). Continuing claims dropped 51k to 3.7 million. The Chicago PMI reported at 70.6 for March, down slightly from last month's record 71.2. Factory orders fell 0.1% while analysts were expecting a 0.4% increase. This combination of tepid economic data coupled with concern over tomorrow's jobs report served to hold back traders from taking any aggressive positions.

My April iron condor on RUT was essentially unchanged at a P/L of +$2,180 with delta = -$15 and theta = +$39. Our adjustments on the May condor are holding the losses steady for the moment as the RUT squeezes our call spreads; the position's P/L = -$1,460, delta = -$14 and theta = +$59. Delta of the 890 calls has increased to 21. If RUT continues making new highs, we may have to reposition this condor soon.

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Written by Dr. Duke

Created: 30 March 2011

The markets gapped open and steadily gained until early afternoon; but very little of that gain was lost in the sideways afternoon trading. Trading volume was up a bit from yesterday, but still below the moving averages. SPX closed up $9 at $1328 and RUT gained $11 to close at $840. SPX has yet to regain the $1343 peak it hit in mid-February before this correction started. In contrast, RUT closed above the pre-correction close of $838. So RUT is once again leading the charge as it did through most of last year. About 2.9 billion shares of the S&P 500 traded today, up a bit from yesterday but well below the 50 dma. Trading volume was up 10% on the NYSE and up 12% on NASDAQ.

ADP reported an increase of 201 thousand private payroll jobs in March; analysts had expected 210k. ADP's report may indicate a favorable jobs report on Friday. If so, that will further fuel this bullish market.

My April iron condor on RUT at 700/710 and 900/910 stands at a P/L of +$1,700 with delta = -$7 and theta = +$123. I adjusted my May iron condor on RUT this morning and improved the Greeks considerably; this position now stands at a P/L of -$1,500 with delta = -$12 and +$58. Subscribers to Flying With The Condor™receive those adjustment trade alerts in real time during market hours.

It fascinates me how quickly the markets can change. It seems like yesterday that traders were concerned about Middle East unrest, the civil war in Libya, the earthquake and the possible nuclear disaster in Japan. Now the bulls are running the show. The lessons for us: trade what the market gives you; don't remain wed to your predictions; adjust or get run over.

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Written by Dr. Duke

Created: 29 March 2011

The sell-off that ended yesterday's trading appeared to continue at the open of trading this morning, but the bulls quickly took control and all of the market indexes steadily climbed throughout the day. SPX closed at $1319 for a gain of $9 while RUT gained $8 to close at $829. SPX appeared to bounce off its 50 dma at $1307 before climbing to its close at $1319. Shortly after this correction began February 22, SPX fought its way back to $1330 before falling to even lower lows in mid-March. So a close above $1330 might signal the end of this correction. A similar "line in the sand" for RUT is $830. And RUT has been flirting with $830 the past three trading sessions, but has been unable to break through thus far. Trading volume was flat to low today with 2.6 billion shares of the S&P 500 trading; that was slightly better than yesterday, but still well below the 50 dma at 3.5 billion shares. Trading was down 3% on both the NYSE and NASDAQ. Low trading volume this near the end of the quarter is a little surprising. Usually one sees a flurry of institutional activity, positioning portfolios for quarterly reporting.

My condors are essentially unchanged from yesterday. The April condor stands at a P/L of +$1900, delta = +$5 and theta = +$77. The May condor stands at a P/L of -$760, delta = -$66 and theta = +$98. While April just continues to grind out the remaining potential profit, the May position flirts with adjustment on the call spread side. The delta of the $890 call = 16. This market continues to tease us, unwilling to commit to an end of the market correction, but not really trading lower either. Reminds me of Greek mythology, with the Gods toying with us humans.

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Written by Dr. Duke

Created: 28 March 2011

It looked like another modest, but upward trending day, but the bears showed up to play during the last few minutes of the trading session, pushing the major indexes to modest losses. SPX closed at $1310, down $4 while RUT lost $2 to close at $822. Trading volume dropped again today with only 2.5 billion shares of the S&P 500 stocks trading. Trading dropped 5% on the NYSE and dropped 10% on NASDAQ. The markets have been surprisingly bullish over the past few sessions given the number of worrisome global events and the apparent inability of the US government to address the spending/deficit issues. The equity markets are being propped up by the Fed. The questions surround how this play ends. The FOMC has announced that QE II will end by the end of the second quarter. Increasing oil and food prices are causing more Fed committee members and Fed watchers to begin to talk about tightening measures. In the meantime, the bulls appear to be in charge, although trading volumes have been anemic, suggesting many traders are wary.

My April iron condor on RUT is just churning out profits in this lackluster market. It now stands at a net gain of $1,900 with delta = +$16 and theta = +$61. My May RUT iron condor at 680/690 and 890/900 stands near break-even with a P/L of -$600, delta = -$55 and theta = +$88.The maximum possible gain on the April condor is $2,400. Some traders make it their practice to close credit spreads when they can confirm a majority of the gains. I have adopted the rule of closing spreads on the Friday before expiration if the spread is less than two standard deviations OTM. Otherwise, I allow the spreads to expire worthless. I prefer not to give away the $20 to $40 per contract plus the trading commissions unless I have to for safety's sake. In my experience, two standard deviations is a very safe margin. If you are trading many contracts, we are talking about several hundred dollars. That may not be much compared to the overall gains, but it is still one or two nice dinners at one of my favorite restaurants, like Picasso's in Las Vegas, or Wildfire in Chicago.

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Written by Dr. Duke

Created: 25 March 2011

Traders ignored the continuing unrest in the Middle East and Libya, the European debt crisis, and Japan's continuing woes and continued their buying spree this morning. The major market averages traded up until about noon and then slowly declined through the afternoon. But the day ended with gains across the board for all of the market indexes. SPX closed up $4 at $1314 and RUT closed at $824, a $7 increase. But all of these gains occurred on lower volume. 2.8 billion shares of the S&P 500 traded; this is not only down from yesterday but well below the 50 day moving average at 3.6B. Trading volume on the NYSE dropped 6% and trading decreased 8% on NASDAQ. Volatility declined slightly with the VIX closing at 17.9%. RUT rose intraday to hit $832 before pulling back to close at $824. RUT hit a temporary high of $830 in early March before dropping to a new low of $776 on March 15. Watching for a close above $830 in RUT would be one signal of a resuming bullish trend. Some analysts see today's strength in RUT as evidence of defensive moves into mid-cap stocks that tend to be primarily domestic companies with minimal global exposure.

My Apr condor on RUT is now positioned perfectly delta neutral with a P/L of +$1,840 and position delta = -$2 and position theta = +$66.

Have a pleasant and relaxing weekend.

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Written by Dr. Duke

Created: 24 March 2011

The markets traded down at the open this morning but then revived and steadily traded upward throughout the balance of the day. The SPX gained $12 to close at $1312, above the resistance level at $1300 that had proven a barrier the last couple of sessions. RUT gained $6 to close at $817. Trading volume was slightly up from yesterday with 3.1 billion shares of the S&P 500 changing hands; this is still well below the 50 dma at 3.6B. Trading volume was up 1% on the NYSE and up 14% on NASDAQ. The VIX dropped down to 18%, the lowest level this month.

Orders of durable goods dropped 0.9% in February, down from a 3.6% gain in January. Analysts had expected a gain of 1.1%. Unemployment claims are basically flat from last week with a 5k decrease in initial claims at 382k and a 2k decrease in continuing claims at 3.7 million. This economic data coupled with European debt issues and the usual problems in the Middle East and Libya appeared to be ignored by traders today - a little surprising, to me at least.

My April iron condor on RUT at 700/710 and 900/910 stands at a P/L of +$1,500 and delta = +$17 and theta = +$92. I will be watching to see if SPX can hold above $1300 tomorrow and give us more confidence that the bullish trend has resumed.

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Written by Dr. Duke

Created: 23 March 2011

The markets traded downward until late morning and then began a gradual climb upward for the balance of the day. The SPX bounced up against resistance at $1300 right before the close and pulled back to close at $1298, up $4. RUT gained $3 to close at $811. A weak home sales report set a negative mood at the outset this morning. New home sales for February dropped 17% to 250k, down from January's 301k. Analysts were expecting 288k. News that Portugal's parliament had rejected the austerity plans also weighed on the afternoon's trading.Traders continue to be concerned about the global economy slowing due to higher oil costs. I think traders are also somewhat reluctant to "go all in" as we anticipate the Fed ending its quantitative easing program. In summary, there are many headwinds for this market that make the likelihood of resuming the strong upward trend less probable. On the other hand, the market has held up rather well in spite of Middle East unrest, a Libyan revolution, natural disasters and fears of a nuclear mishap. This leads me to expect the markets to continue to trade sideways or slightly upward.

My April iron condor on RUT is benefiting from this trading range; it now stands at a P/L of +$1,660, delta = +$14 and theta = +$68. So we will just continue to play what the market gives us. Don't fall asleep.