Dr. Duke's Blog

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Written by Dr. Duke

Created: 04 February 2011

The jobs report surprised and puzzled analysts this morning. The good news was an unexpected drop in unemployment from 9.4% to 9.0% - most analysts were expecting an increase to 9.5%. The bad news was a less than expected number of new jobs created of 36k - analysts were expecting 135k. Should we interpret this as good or bad news? Some analysts noted that the population estimates used in the unemployment rate calculations were revised this month and this accounted for the unexpected drop in the unemployment rate. The report also revised the last 12 months of jobs data to reduce the number of new jobs reported by 378 thousand. Judging from the choppy sideways day in the markets, most traders didn't take this jobs report as great news. SPX closed at $1311, up $4 while RUT gained a little over one dollar to close at $800. This is the fourth day SPX has managed a close above the support level of $1300, so that is positive for the bulls, but the market action has been anemic. Trading volume was flat to down with 3.0 billion shares of the S&P 500 stocks trading, down from 3.5 billion yesterday. Volume decreased 9% on the NYSE, while trading was up 1% on NASDAQ.

Those of you trading PCLN were given a shock today when they announced that earnings would be webcast on Feb. 23, an announcement previously scheduled for Feb. 17 before Feb options expiration. This caused the implied volatility (IV) in the Feb options to collapse and IV in March exploded. I had a Feb/Mar $420 call calendar that was doing well with a 32% gain until this morning when I closed it for a 127% gain! However, anyone holding long Feb options on PCLN is crying in their beer at this hour.

My Mar iron condor spread is doing well with a P/L of +$260, position delta of -$16 and position theta = +$77. The 875/885 calls are over one standard deviation OTM while the 690/700 put spreads are almost two standard deviations OTM.

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Written by Dr. Duke

Created: 02 February 2011

The markets opened up this morning down a few points and just chopped sideways through the day on lower volume. SPX closed at $1304, down $4 while RUT closed at $796, down $3. Trading volume declined across the board with 3.2 billion shares of the S&P 500 stocks trading; volume declined 14% on the NYSE and declined 12% on NASDAQ. The volatility index (VIX) dropped to 17.3%, not quite back to the lows last Thursday around 16% (before the big down day Friday). The fact that SPX was able to hold its close above the previous resistance level (now support) of $1300 was a positive indicator for a continued bullish trend. The ADP payroll report was positive with a gain of 187k jobs in January while analysts expected 145k, but the markets didn't take notice.

I closed my AAPL Feb 310/320 call spread for a 30% gain today and I also closed the RUT Feb iron condor with $0.20 debits on each side for a gain of $2,500 or 15% on capital at risk (20 contracts). This was an unusual month for the condor trader; I never adjusted the Feb position. That only happened once in 2010. The RUT Mar condor stands at a P/L of -$300, delta = -$13 and theta = +$82.

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Written by Dr. Duke

Created: 01 February 2011

Futures were looking very positive before the bell this morning and the markets gapped up at the open and didn't look back; the major indexes closed at or near their session highs. Apparently Egypt is yesterday's news for traders. SPX closed up $21 at $1308, solidly breaking through resistance at $1300. RUT gained $18 to close at $799, still off of its high in mid-January. Trading volume was up with 3.8 billion shares of the S&P 500 changing hands; trading was basically flat to slightly down on the NYSE with a 2% drop and trading volume increased 19% on NASDAQ.

Today was a slow day for economic data; the ISM Manufacturing Index came in at 60.8 for January, which was a six year high; analysts had expected a value of 58.4. But construction spending dropped 2.5% in December.

My Feb iron condor on RUT stands at a P/L of +$2,440 with a position delta of -$13 and position theta of +$117 on 20 contracts. The Mar RUT condor stands at -$360, delta = -$16 and theta = +$78.

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Written by Dr. Duke

Created: 31 January 2011

The markets opened up in positive territory and chopped sideways, but retained positive gains all day. It appeared that traders decided the crisis in Egypt was not the threat to global markets that was feared on Friday. The huge jump in the Chicago PMI probably was a factor as well. Its value for December came in at 68.8; this is the highest level for this index since 1988.

SPX closed at $1286, a rise of $10 and RUT gained $6 to close at $781. Trading volume was down from Friday; 3.5 billion shares of  S&P stocks traded today; although this was down from Friday, it remains above the 50 dma. Trading volume on the NYSE dropped 16% and decreased 18% on NASDAQ. Today's gain on SPX confirmed a 2.3% increase for the month of January; this is the first positive gain for the month of January on SPX since 2007. Many analysts believe January's performance foretells the performance for the year; I'm not sure I believe that, but it does set a tone for traders at a minimum.

My Feb iron condor on RUT stands at a P/L of +$2,580 with delta = +$18 and theta = +$65. My Mar iron condor on RUT at 690/700 and 875/885 stands at a P/L of -$140 with delta = +$17 and theta = +$56.

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Written by Dr. Duke

Created: 28 January 2011

Markets were alarmed today about possible ramifications of unrest in Egypt on oil prices and the possibility of unrest spreading in the Middle East. A disappointing GDP report for the 4th quarter didn't help. Growth in Q4 GDP was 3.2%, which isn't too bad, but traders were expecting 3.7%. Markets opened down and sank throughout the day. SPX closed just above its lows for the day at $1276, down $23 on the day. RUT lost $20 to close at $775. Trading volume was up with 4.5 billion shares of the S&P 500 stocks trading. Volume increased 34% on the NYSE and increased 17% on NASDAQ. The VIX opened the day under 16% but closed at 20%, a huge jump upward, reflecting the market's anxiety over global events and where this might drive the markets.

My Feb iron condor on RUT stands at a P/L of +$2,400 with delta = +$19 and theta = +$62. Increasing IV diminished the gains on this position, but it remains well positioned in spite of today's big downward move.

I was somewhat encouraged that SPX basically hit its lows for the day around noon and bounced around the 1275-1280 area the rest of the day. That isn't to say it can't go lower Monday, but it wasn't a case of free fall either. Some of the market's leaders, like AAPL and PCLN didn't lose much today, so wholesale selling hasn't yet broken out. But we'll see what next week brings. Perhaps things will calm down a bit in Egypt over the weekend.

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Written by Dr. Duke

Created: 27 January 2011

The markets opened flat this morning and chopped sideways most of the day, but managed to hang onto some modest gains into the close. The Dow continues to flirt with $12,000 but can't quite make it there. SPX closed up $3 at $1300. This is seen as a significant technical resistance level because this was the last high for SPX before the market fell off the cliff in the fall of 2008. RUT closed at $795, up $2. The S&P 500 stocks traded down a bit from yesterday at 3.5 billion shares. Trading on the NYSE was down 8% and flat on NASDAQ. Initial unemployment claims jumped 51k to 454k and the number of continuing unemployment claims also increased by 94k. But this didn't seem to disturb the market too much, although it may have tempered the bullish action a bit.

My Feb RUT iron condor stands at a P/L of +$2,640 with delta = -$9 and theta = +$66. We are now standing at about 80% of the maximum profit which argues to close the trade. On the other hand, the call spreads are about 1.5 standard deviations OTM and the put spreads are nearly three standard deviations OTM, so that would argue that it is safe to allow this trade to continue to gain in profit ($660 remains on the table). I will probably allow the time decay to progress through another weekend before closing the position. Being too greedy can get one into trouble, but not collecting the gains when the probabilities are on your side doesn't make sense either. The answer is somewhere in between.

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Written by Dr. Duke

Created: 26 January 2011

The markets ran to new highs today. The Dow broke through the $12,000 target everyone has been watching, but couldn't hold it into the close. SPX closed up $5 at $1297, the highest level of this index since September of 2008. RUT rocketed up $14 today to close at $794, but is still below its 52 week high of $808 set last week. Trading volume in the S&P 500 was down a bit from yesterday at 3.6 billion shares, but remains above the 50 dma. Trading on the NYSE was up 3% and volume was up 5% on NASDAQ. New home sales were encouraging, coming in at 329k for December, up from 280k in November. The FOMC statement was released this afternoon, but there were no surprises, and consequently no effect on the markets. Interest rates remain unchanged and the current round of quantitative easing continues.

My Feb iron condor on RUT stands at a P/L of +$2480 with a position delta of -$12 and position theta of +$82. We will be establishing our March iron condor soon and may close the Feb position early and take that risk off the table.

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Written by Dr. Duke

Created: 25 January 2011

The S&P 500 spent almost the entire day in negative territory but rallied at the close to end the day basically flat. Trading volume was up today, so while it may not qualify as a strong bullish day, the end of the day recovery is encouraging. SPX closed unchanged at $1291 and RUT closed up less than a dollar at $780. Trading volume in the S&P 500 rose to 3.8 billion shares and increased 12% on the NYSE. Volume was up 2% on NASDAQ. The Consumer Confidence Index of the Conference Board hit an eight month high of 60.6 in January, up from 53.3 in December. The Case Schiller Housing Price Index dropped 1.6% in November after a 0.5% drop the previous month. The FOMC meeting started today; their statement will be released tomorrow afternoon but most analysts don't expect any substantive changes.

I was encouraged this morning as AAPL, IBM and GOOG all traded upward while the overall market was trading downward. That behavior, coupled with the late day recovery is encouraging, but it still pays to be cautious. Employ good risk management.

My Feb iron condor on RUT continues to be well positioned with a P/L of +$2,520, delta = +$7 and theta = +$61.

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Written by Dr. Duke

Created: 24 January 2011

Large technology names like AAPL and GOOG made some nice gains today and led the broader market higher. IBM's bullish run since its positive earnings announcement last week has driven the Dow close to breaking the $12k level. SPX closed up $7 at $1291 and RUT closed at $779 for a $6 increase. Today's price action was certainly encouraging to the bulls, but SPX really needs to break through the high set last week at $1296 to confidently establish itself as having returned to the bullish uptrend. However, those market analysts looking for a healthy correction can't be too comfortable because last week's weakness didn't really qualify as a correction. Additional data on the bearish side of the camp would be the lower volume on today's positive price action. The market surged pretty strongly across the board, but trading volume was down. Only 3.2 billion shares of the S&P 500 traded, below the 50 dma. Trading was down 25% on the NYSE and was essentially flat (down 1%) on NASDAQ. No significant economic news was out today; the FOMC starts its meeting tomorrow and will issue a statement Wednesday. Nothing new is expected from the FOMC but the risk of a surprise can't be ignored.

My Feb RUT iron condor at 680/690 and 860/870 stands at a P/L of +$2,260 with delta = +$15 and theta = +$69. Some have asked me why I don't roll up the put spreads in this position to sweeten the potential gains. Normally that would be a possibility, but I have been concerned about a possible down turn in this market after having such a strong bullish run, and I felt more comfortable with that large safety margin on the downside. In addition, it is looking more probable each day that I can possibly come close to the full maximum gain for this position of $3300 on 20 contracts. That's about 20% on the capital at risk - that is an excellent gain. I don't want my greed to risk compromising that gain.

Watch tomorrow's open to see if this bullish run can continue. Strong follow through that pushes SPX above $1300 would be very bullish.

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Written by Dr. Duke

Created: 21 January 2011

In spite of stellar earnings reports, AAPL and GOOG have been trading off for the last couple of days. NASDAQ has lost ground for three days in succession. The S&P 500 (SPX) gained $3 to close at $1283 while RUT continued its losing streak to close at $773, down $5. In 2010, RUT outperformed SPX very consistently - not so this year. Trading volume was mixed; trading in the S&P 500 was flat at 4 billion shares; trading was up 5% on the NYSE but down 17% on NASDAQ. The market action on SPX has been interesting the past two days. Yesterday's price action revealed the classic hammer candlestick; the hammer often signifies the reversal of a downward trend since the market trades down, but finds buyers and trades back up, leaving the long lower shadow of the candlestick. Today's shooting star candlestick is essentially the opposite signal: the market trades up, but sellers take it back down to close near its open. That often signifies the reversal of an upward trend. Having these two signals back to back tells me this market is in stalemate between the bulls and the bears; neither group seems to be able to move decisively and make it stick. But that also means we may be subject to a big move one way or the other if pushed by the right piece of news or economic data. I had begun to establish some of my Feb spreads this week, but chose hold off on placing any additional directional trades today. I will give this market another day or two to settle down.

SPX settled at $1289.25 so my Jan SPX 1210/1220 put spreads expired worthless. This confirms the net loss of 5% for the Jan SPX iron condor. The Feb iron condor on RUT stands at a P/L of +$2,000 with position delta = +$20 and position theta = +$67 (on 20 contracts). For those of you with Jan condors on RUT, the settlement price = $782.92.

Have a nice weekend.