Dr. Duke's Blog

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Written by Dr. Duke

Created: 22 March 2011

The markets opened upward a bit this morning, but immediately hit technical resistance and traded sideways and down the rest of the day. SPX hit $1299 right after the open, but never got close to $1300 again all day, closing down $5 at $1294. RUT closed at $809, down $4 on the day. Trading volume was very low with only 2.8 billion shares of the S&P 500 stocks trading today; this is the lowest trading volume in the S&P 500 this year. Similarly, trading on the NYSE was down 17% and trading volume was down 6% on NASDAQ. Traders continue to be focused on the unrest in the Middle East and Libya; oil traded above $105 today. The good news is that the markets have not broken down to test recent lows, but the bad news is that the bulls have not regained control of the markets. Based on today's volume, it appears most traders are on the sidelines watching and waiting.

My April iron condor on RUT at 700/710 and 900/910 is in excellent shape with both spreads about two standard deviations OTM. The current P/L is +$1,300 with a position delta of +$14 and a position theta = +$93.

So we continue to watch for signs of a renewed bullish trend or a continued correction. Or do we muddle sideways for a while?

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Written by Dr. Duke

Created: 21 March 2011

The markets gapped up at the open this morning but then largely traded sideways all day. SPX hit resistance at $1300, but held up pretty well, closing at $1298, up $19. RUT traded up more strongly, breaking through resistance at $807 to close at $813, up $18. Traders were calmed by improving news from efforts to bring the nuclear reactors in Japan under control and the UN's efforts in Libya. Oil prices remain high, but that didn't weigh on the market today. Trading volume dropped from Friday with 3.7 billion shares of the S&P 500 changing hands, but this is still above the 50 dma. Trading on the NYSE dropped 36% and trading volume dropped 32% on NASDAQ. It isn't clear as yet, from a technical standpoint, that this market correction is over. I would like to see follow through tomorrow with an open above $1300 on the SPX. The only economic data reported today was existing home sales for February at 4.88 million, down from January's 5.40 million, but traders didn't seem to take notice.

An excellent example of the irresponsible media hype was a headline on an article that read "Radioactivity Discovered in Foods", relating to tests of vegetables from areas of Japan near the stricken nuclear plants. But upon further reading, one finds that the level of radioactivity measured was equivalent to less than a quarter of the exposure of a single x-ray in your doctor's or dentist's office. Journalists once held their lack of bias as a measure of their integrity, but more and more, journalists pride themselves on pushing their own agenda as they write their stories.

VIX dropped to 21% today and this helped my Apr iron condor on RUT at 700/710 and 900/910. It now stands at a P/L of +$1,820 with delta = +$26 and theta = +$25. Theta for our position is rather low at this point because the call spreads are almost worthless. If RUT continues to trade higher, we will be able to close this condor early for most of our 14% profit potential. Delta of the short puts is at 6 whereas the delta of the $900 call is less than one.

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Written by Dr. Duke

Created: 18 March 2011

The markets opened strongly this morning but then proceeded to steadily give it back throughout the day. SPX closed at $1279, up $5 but only $3 off its low for the day. RUT closed up $9 at $795. Trading volume was up strongly from yesterday with 4.3B shares of the S&P 500 stocks trading. Trading was up 52% on the NYSE and trading volume was up 30% on NASDAQ. Options expiration probably drove most of this volume. SPX Mar options settled at $1287.71 and RUT settled at $793.28. Today's candlestick on SPX was the classic shooting star; when the bulls cannot hold the highs, it isn't a good sign.

All of the spreads of my Mar iron condor at 730/740 and 875/885 expired worthless today for the maximum gain of $4,160 or 24% on capital at risk. The Apr condor stands at a P/L of +$700 with a position delta of +$39 and theta = +$59.

Enjoy your weekend!

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Written by Dr. Duke

Created: 16 March 2011

The headline news has traders in a pessimistic mood, moving assets to cash. The SPX lost $25 today to close at $1257 while RUT closed down $9 at $782. Trading volume jumped up again today from high levels yesterday. 4.7B shares of the S&P 500 stocks traded today. Trading volume was up 11% on the NYSE and up 10% on NASDAQ. SPX bounced off support at $1260 yesterday and traded higher, but today it closed below that key support level. If it cannot hold $1260 tomorrow, we could see some real damage. The next support level is just below $1230, the peak set in November. SPX is now down 6% from the peak in February; a drop to $1230 would make it an 8% drop. Most corrections have historically averaged around 7-9%.

Economic data didn't create any confidence for traders to offset all of the bad news from Japan, the Middle East and Libya. Housing starts for February came in at 479k, down from last month's 6187k. Building permits were also down at 517k from last month's 563k. In addition, PPI spiked up with a 1.6% increase, fueled by energy and food price increases.The only less-than-bad news was oil prices remaining around $99/bbl.

My March iron condor continues to make its way to expiration with a P/L of +$3,660, delta = +$42 and theta = +$617. The 740 puts remain over three standard deviations OTM; unless the market tanks further tomorrow, I will allow all of the March spreads to expire worthless for the max gain of 24%. The Apr condor on RUT stands at a P/L of -$160 with delta = +$50 and theta = +$46. The delta of the Apr 710 put closed at 17.6 and is right at one standard deviation OTM.

So my iron condor positions are weathering the storm well, but most of my AAPL trades are underwater. The exception is my AAPL LEAPS that I have been selling calls against; those LEAPS remain profitable even after today's big drop. So now we watch to see if the indexes continue to drop or if traders realize that the US economy isn't that bad.

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Written by Dr. Duke

Created: 15 March 2011

The equity markets in this country behaved as though that was the headline this morning, as all of the major indexes plunged at the open. SPX traded as low as $1261 before recovering to close at $1282, down $15 on the day. RUT lost $7 to close at $791. The $1260-$1261 support level was established back in late December; today's action reaffirmed that support level. Volatility (VIX) jumped 3 points to close at 24%. Japan's Nikkei closed at a new 52 week low, but that is more understandable. Why did our markets drop so severely? I think the answer is the same reason we have seen such volatility in the markets since 2008 - fear. Today's FOMC report once again reaffirmed the growing body of data supporting a slow, but solid, economic recovery. But the fear remains because we see neighbors out of work and unable to sell their houses. We watch a dysfunctional government continuing to play politics with our country's future. The generally positive corporate earnings announcements appear in stark contrast to what we see everyday.

Trading volume was up strongly today with over 4.3 billion shares of the S&P 500 changing hands; trading was up 33% on the NYSE and also up 33% on NASDAQ. Strong trading volume on a down market day could be considered bearish. But look at a minute chart of the SPX; from about 10 am this morning, the market simply climbed upward, and that climb occurred on a big spike up in volume; that strikes me as pretty bullish.

The Fed reaffirmed QE II and the New York Fed's Empire Manufacturing Survey reported out at 17.5 for March, up from 15.4 last month. The National Association of Home Builders (NAHB) Housing Index came in at 17 for March, up 6%. So the indicators for our economy continue to point upward, but the fear remains.

The spreads of my March iron condor on RUT continue to cruise toward expiring worthless. The call spreads are over five standard deviations OTM while the put spreads are over three standard deviations OTM. The P/L stands at +$3,740 with delta = +$36 and theta = +$291. The Apr condor on RUT at 700/710 and 900/910 stands at a P/L of -$280 with delta = +$32 and theta = +$92. Today's volatility spike pushed it underwater but it remains delta neutral with a strong positive theta.

Conservative traders should remain cautious and protective, but I think the bulls are still in charge of this market. But there are many Chicken Little characters running around (younger readers may have to look that up).

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Written by Dr. Duke

Created: 14 March 2011

News of the disaster in Japan coupled with ongoing concerns about the Middle East and Libya overwhelmed traders today. The SPX fell to $1286 before beginning to recover in the early afternoon. SPX closed at $1296, down $8 and RUT lost $4 to close at $798. Support on the major indexes continues to hold, but the dips are not being bought aggressively and trading volume is light. Trading in the S&P 500 stocks was up a bit from Friday at 3.4 billion shares but still below the 50 dma. Trading on the NYSE was up 6% while it was down 4% on NASDAQ. The VIX jumped up to 21% today.

My Mar condor on RUT at 730/740 and 875/885 stands at +$3,960 with delta = +$17 and theta = +$129. Both spreads remain OTM by more than two standard deviations, so I will allow them to expire worthless unless that changes. The March condor will likely close out at a maximum gain of 24% with both spreads expiring worthless - very unusual. The Apr RUT condor at 700/710 and 900/910 stands at a P/L of +$480, delta = +$21 and theta = +$73. Both spreads are about one and a half standard deviations OTM, so this condor is well positioned with 31 days to expiration.

Most measures of the stock market's price levels (price/book, price/sales and price/earnings ratios) appear average to below average, so the market doesn't appear to be strongly overbought at this point. I think that is what is holding the markets at support levels as traders worry about a variety of global concerns. So we may continue in this sideways trading range for a while, or some unexpected global event will push the markets off the edge. It's a tough time for directional traders, but a great time for delta neutral traders.

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Written by Dr. Duke

Created: 11 March 2011

The markets opened downward this morning and chopped sideways until around noon when a steady climb upward began. SPX closed up $9 at $1304 while RUT closed at $803, up $3 for the session. Trading volume dropped off markedly with 3 billion shares of the S&P 500 trading, down from yesterday and well below the 50 day moving average. Trading on the NYSE was down 18% and trading volume dropped 22% on NASDAQ. Early news of a major earthquake in Japan worried traders but as news came in from Saudi Arabia of "business as usual" and no protesters rioting in the streets, the market began to slowly climb. Markets ended yesterday at a solid support level and this session's bounce upward was encouraging. However, it came with lower volume. A strong upward move on increasing volume would be more encouraging. Volatility dropped off with an 8% decline in the VIX. This is a positive sign, suggesting institutional investors were not buying protection in volume. Oil prices also softened a bit and this helped the equity markets stabilize.

Someone asked me about the DOW the other day and it made me realize how little I follow that index. The SPX is a much better gauge of the overall market with 500 mid-cap and large-cap stocks as compared to the 30 Dow blue chip stocks. When I look at the SPX chart, I can't take too much confidence based on today's price action. It certainly isn't bad (I was expecting worse today, especially in light of the earthquake). But today's modest rise just barely gets us back into the trading range of the past few weeks. And the light trading volume isn't reassuring either.

The drop in volatility helped my RUT condors, but IV on RUT is still relatively high at 28%. The Mar position at 730/740 and 875/885 stands at a P/L of +$3,620 and a position delta = +$18 and position theta = +$198. The put spreads are 2.2 standard deviations OTM and the call spreads are 2.5 standard deviations OTM, so I decided to leave both sides of the position open over the weekend. If either spread gets close to two standard deviations OTM, I will close it next week. Reaching the Friday before expiration week with both spreads of the condor over two standard deviations OTM is very rare, especially over the past two years. The April iron condor on RUT stands at a P/L of -$100 with a position delta = +$8 and position theta = +$97. The theta/delta ratio is very strong and each spread is about 1.3 standard deviations OTM with 35 days to go to expiration.

BTW, NFLX hates me. I sold the 190/200 put spread on Monday, threw in the towel on Wednesday as it traded down into the mid-190s, and today it closed just under $205. I will let you know when I trade NFLX again so you can go the other way.

Enjoy the weekend.

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Written by Dr. Duke

Created: 10 March 2011

Several pieces of disappointing economic news and continued conflicts in Libya and Saudi Arabia combined to torpedo the markets today. The SPX dropped almost immediately after the open to the long-term support level around $1300 and traded sideways along there most of the day. SPX closed at $1295, down $25 for the day. RUT lost $22 to close at $800. Trading volume spiked up with 3.7 billion shares of the S&P 500 stocks changing hands; this is above the 50 dma at 3.5B. Trading on the NYSE was up 28% and was up 19% on NASDAQ. The next support level on SPX is at $1275, set on January 28, "Egyptian Friday". If we break through $1275, the next strong support level is down at $1227, the top set last November. From a charting perspective, RUT could easily fall to the area of $770 to $780 if it can't hold $800.

Crude oil dropped to just above $100 earlier today but closed near $103 based on some news from Saudi Arabia of clashes of protesters and police. China surprised everyone by posting a trade deficit, fueled by higher oil prices (imports) and weaker demand for exports. Moody's downgraded Spain's debt. And if that wasn't enough bad news, initial unemployment claims increased to 397k from last week's 371k, while continuing unemployment claims dropped by 20 thousand. So today's market weakness isn't too surprising and many market indicators have been suggesting a correction. We are now 3.6% off of the SPX high of $1343 in mid-February. A typical correction of 9% would take us to $1222, near that support level set in November - that would hurt. Or can we continue to churn sideways as we have for the past three weeks or so? It has been a volatile ride but SPX has stayed in the range of $1340 to $1295. If we open downward tomorrow, that would not be a good sign.

Today's increase in volatility pulled down the profitability of both of my condors (condors are negative vega positions). My Mar condor stands at a P/L of +$3,000 with delta = +$43 and theta = +$235. Surprisingly, both spreads in this position are now over two standard deviations OTM as we approach the last week of the trade - very unusual. The Apr position stands at a P/L of -$500 with delta = +$18 and theta = +$92.

So now we watch to see which way this market moves tomorrow: new lows or back into the consolidation range?

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Written by Dr. Duke

Created: 09 March 2011

Oil prices dropped about 1% today and oil inventories increased over 2.5 million barrels last week (only one million was expected), but this didn't tempt traders to start buying again. The SPX lost $2 to close at $1320 and RUT closed at $821, down $3. Trading volume was down except in the tech stocks as semiconductor stocks especially took a bath. 2.9 billion shares of the S&P 500 stocks traded today, well below the 50 dma. Volume was also down on the NYSE by 11%, but increased 9% on NASDAQ. Mortgage applications increased 16%; this is thought to primarily reflect investors buying properties, but it is a good sign nonetheless.

The markets appear to know where my iron condors are positioned and are doing their best to cooperate - very unusual behavior. My Mar RUT condor at 730/740 and 875/885 stands at a P/L of +$3,500 with a position delta of +$1 (yes, one dollar) and position theta of +$170. The put spreads are almost three standard deviations OTM and the call spreads are nearly two standard deviations OTM. The Apr RUT condor is also well positioned at 700/710 and 900/910 stands at a P/L of -$360, with position delta = -$19 and theta = +$104. The theta/delta ratios of both positions are excellent. I view my position delta as my principal measure of risk while the position theta is my measure of profit generation. In condor land, the traders are unusually happy today. Through most of 2010, they were in therapy.

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Written by Dr. Duke

Created: 08 March 2011

The markets took off to the races today and essentially replaced yesterday's losses in a surprising turn-around. SPX gained $12 to close at $1322 while RUT also tacked on $12 to close at $825. But trading volume was flat to down from yesterday with the S&P 500 stocks trading right at the 50 dma of 3.4 billion shares. Trading was down 3% on the NYSE and down 16% on NASDAQ. With oil still trading near $105/bbl, this market rally was surprising. Investors Business Daily (IBD) reset their market posture to "Market in Correction" from "Uptrend Under Pressure". This move was based on yesterday's market losses, but it is significant because it reflects many weak technical internals for this market.

Of course, the tendencies for this market to trade up and then back down the past couple of weeks has been good news for my condors. The Mar position on RUT at 730/740 and 875/885 now stands at a P/L of +$3,340 with delta = -$15 and theta = +$192. Theta is really ramping up as we near expiration. The Apr condor on RUT at 700/710 and 900/910 stands at a P/L of -$300 with delta = -$27 and theta = +$99. This position is in good shape as evidenced by the strong theta/delta ratio and the small deltas of about 8 for each of the short options in the spreads.

So we wait to see what the markets will bring tomorrow. My opinion is that the overall bullish trend is still intact, although some extraordinary events in the Middle East or Libya could change that at any time. But barring that, I expect oil prices to stabilize and some of the fear to come back out of the markets. But it seems unlikely that the bullish trend will continue with the steepness of the advance we saw a couple of months ago.