Dr. Duke's Blog

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Written by Dr. Duke

Created: 19 January 2011

Many of us have been expecting a pull back for some time but it seemed that every moment of weakness in the market was met with renewed buying.The markets opened down a bit this morning and about 10 am ET, it appeared that the buyers were going to buy the dip once again, but then the markets turned south and never looked back. SPX lost $13 to close at $1282 while RUT was hammered with a $21 loss to close at $787. Trading volume was above average but lower than yesterday with 3.4 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE was down 5% but it was up 5% on NASDAQ. Housing starts for December fell 4.3% to 529k; 550k were expected. But December's building permits jumped 17% to 635k, the highest level since March 2010.

It isn't clear to me what precipitated this sell off. AAPL's and IBM's earnings announcements were stellar. GS's earnings beat expectations but they missed on revenues. There wasn't any obvious dreadful news to account for the selling. I was busy with some other work and had CNBC muted all day; I should have tuned in; I am sure the talking heads had some nice packaged answers.

My Jan SPX iron condor has been teetering on the edge of disaster for a few days, so when the market dipped a bit this morning, I took the opportunity to close my 1300/1310 call spreads. Of course, if I had waited, I could have safely allowed those spreads to expire worthless. Assuming the 1210/1220 put spreads expire worthless, this position will lose $899 on 20 contracts or 5%. I hate that rear view mirror.

My Feb RUT iron condor is now in nearly perfect position with a P/L of +$1900, delta = -$14 and theta = +$81. And that sums up delta neutral trading rather well - some trades work out as planned and some don't. The trick is minimizing those inevitable losses. It is disappointing to start the new year with a loss, but our returns on the Feb condor may easily compensate for the losses in January. And that underscores the importance of risk management.

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Written by Dr. Duke

Created: 18 January 2011

It seemed as though there were no other stocks trading today. APPL was the topic of almost every analyst on CNBC. Of course, we expected some attention with the earnings announcement this evening, but the announcement of Steve Jobs taking a medical leave added a new layer of questions and speculation. AAPL opened at $330 this morning and traded as low as $326 before bouncing and recovering most of its losses, closing at $341. In after hours trading, AAPL was trading up to $355 after blowing away the earnings and revenue estimates, but was pulling back as I write this blog. After watching AAPL bounce off $326 this morning, I entered my February 310/320 call spread and was already up 17% at the close. GOOG was another stock worth watching today; while the overall market was trading sideways, GOOG gained $15 to close at $640 - very bullish action. I put on a calendar spread to take advantage of GOOG's ramp-up in IV before their earnings announcement Thursday.

The overall market wasn't nearly as exciting with choppy sideways trading most of the day. SPX closed up $2 at $1295 and RUT closed unchanged at $808. Trading volume was up with 4.7 billion shares of the S&P 500 stocks changing hands (the 50 dma = 3.4B). Trading volume increased 9% on the NYSE but was flat on NASDAQ.

My Jan iron condor on SPX is teetering on the brink of a loss for this first month of the new year. This position's theta hit $1363 today which erases a lot of position losses, but the SPX is breathing down the neck of the 1300 calls. The Feb iron condor is in excellent position with a P/L of +$800, delta = -$72, and theta = +$121.

The bears and bulls appear to be basically balanced at this point with neither camp able to take control of the ball. The largest concern appears to be the European sovereign debt issue at this point since most of the economic data here at home is consistently pointing to recovery, albeit a slow recovery. My crystal ball just clouded over, so I'm not sure what we have in store. So I will just trade what the market gives me.

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Written by Dr. Duke

Created: 14 January 2011

Our markets opened down this morning, primarily in response to losses in overseas markets, but by about 10:30 am, the markets began a steady climb upward, led by the financials. SPX closed the day at $1293, up $9 while RUT gained $7 to close at $808. The Consumer Sentiment Survey from the University of Michigan reported 72.7 for January, down from December's 74.5 and below expectations. The December Consumer Price Index (CPI) rose 0.5% in December, higher than expected and also in line with the higher than expected PPI earlier this week. These numbers caused some concern about inflation beginning to grow. But while this economic data stoked some anxieties, JPM's earnings report beat expectations and this appeared to energize the markets.

I decided to keep the call spreads of my Jan SPX condor open until after the long weekend to benefit from the additional time decay, but that could be a costly mistake if this bullish run continues Tuesday. The Feb RUT condor is well positioned with P/L of +$680, delta = -$72 and theta = +$101. The trades from my trading group continue to perform well. I closed the NFLX Jan 165/175 call spread today for a 30% gain and our NVDA calls are up over 300%. The trading group track record now stands at +55% since the group started in April last year.

Google a copy of Martin Luther King's "Dream" speech and read it this weekend. I think you will be impressed.

Enjoy the long weekend!

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Written by Dr. Duke

Created: 13 January 2011

Unemployment claims took an unexpected jump this morning and that appeared to set the tone for a sideways trading day. Initial unemployment claims came in at 445k, up from last week's 410k. While continuing unemployment claims dropped to 3.88 million from last week's 4.13 million, most analysts dismissed that as being the result of unemployment benefits expiring rather than claimants finding new jobs. The Producer price Index (PPI) increased 1.1% in December, raising inflation concerns with some analysts. The markets traded largely sideways on flat volume in the face of these economic reports. SPX closed down $2 at $1284 and the Russell 2000 Index (RUT) closed at $801 for a loss of less than one dollar. Trading in the S&P 500 stocks was up slightly from yesterday at 3.6 billion shares; trading volume declined 3% on the NYSE and increased 3% on NASDAQ.

My Jan SPX iron condor is still teetering on the edge with a P/L of -$1739, delta = -$217 and theta = +$358. The 1200/1210 put spreads are greater than two standard deviations OTM, but the $1300 calls have a delta of 25. My Feb iron condor on RUT is standing at a gain of $640, with delta = -$63 and theta = +$106.

Before the opening bell in the morning, traders will be watching for the earnings announcement of J.P. Morgan Chase (JPM); this could set the tone for Friday's trading. The financials led the bull run in December and could be expected to continue that leading role if this bull market is destined to continue higher.

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Written by Dr. Duke

Created: 12 January 2011

Successful debt auctions yesterday in Greece and today in Portugal reassured traders and the markets traded in positive territory all day. SPX ran up $11 to close at $1286 and RUT closed at $801, up $7. Trading volume edged up a little with 3.5 billion shares of the S&P 500 stocks trading; this is slightly above the 50 dma. Trading was up 3% on the NYSE but down 1% on NASDAQ. The Fed's Beige Book was released today, but it didn't reveal anything new - just more anecdotal evidence of a slowly recovering economy.

My SPX Jan iron condor is being pressured on the call spread side as we get down close to the wire. The January position's Greeks deteriorated significantly today with delta = -$220 and theta = +$253. Absent a pull back, I will have to close the call spreads early. My Feb iron condor on RUT stands at a $580 gain with delta = -$58 and theta = +$102.

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Written by Dr. Duke

Created: 11 January 2011

The markets started the morning in positive territory but selling pressure quickly turned the tide. But the bulls reasserted themselves and recovered the losses before the market closed this afternoon. The earnings announcement season officially started last evening with Alcoa. Although Alcoa reported better than expected earnings, profit taking took the stock back a bit today. The earnings announcements and the sovereign debt problems in Europe are being watched closely by traders. The market appears to be teetering back and forth with neither the bulls nor the bears able to take control. SPX traded as low as $1270, but closed up $5 at $1274. RUT traded up $3 to $795. Trading volume pulled back a bit today with 3.2 billion shares of the S&P 500 changing hands. Trading volume declined 2% on the NYSE and increased 2% on NASDAQ.

My Jan SPX iron condor stands at -$1139, with delta = -$95 and theta = +$424. Theta is really starting to ramp up now that we are less than two weeks to expiration. The Feb condor on RUT stands at a gain of $780 with delta = -$48 and theta = +$97. The market is caught between the downward pressures of a slow economic recovery and sovereign debt concerns, and the upward pressures of the Fed's QE II and and a large amount of cash coming out of bonds into equities. So far, a clear direction has not revealed itself. Although I would argue that the bias is to the upside. In recent trading, every market dip has been met with buyers, as it was today. We'll see.

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Written by Dr. Duke

Created: 10 January 2011

I'm sorry I missed getting my blog out earlier today. A friend entered the hospital this afternoon and I am just returning home. A brief observation on the markets: notice how strong the support level appears to be at about $1260 on SPX. Once again today, the buyers appeared when the market neared that level. I conclude that if or when SPX breaks $1260 going down, it may get ugly in a hurry.

My Jan SPX iron condor is nearing break-even with a P/L of -$439, delta = -$84 and theta = +$270. The Feb RUT condor stands at a P/L of +$600, delta = -$30 and theta = +$92. Have a pleasant evening. I will check back in tomorrow.

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Written by Dr. Duke

Created: 07 January 2011

Early this morning, I looked at Yahoo Finance and was surprised to see a headline to the effect that the "world" was waiting on the U.S. Non-Farm Payroll Report. This jobs report seemed to take on even greater significance as we enter the new year and everyone is focused on determining which way the markets are headed. The jobs report was actually reasonably positive with a reduction in the unemployment rate to 9.4% and an increase of 113k jobs, but that improvement wasn't as dramatic as the market was expecting. Given that the consensus from economists was an unemployment rate increase to 9.8%, this report appeared positive to me at first blush. Bernanke's testimony to Congress this morning was conservative (he is a banker, after all), stating his expectation for continued economic recovery in 2011 but at a slow pace and with only modest improvements in the unemployment rate. For the first time this week, trading volume was flat with 4.2 billion shares of the S&P 500 stocks trading; trading volume was flat on the NYSE and dropped 6% on NASDAQ. The SPX dropped $2 to close at $1272 while RUT closed at $788, down $4. SPX was down as far as $1262 this morning before bouncing back and recovering most of its losses before the close.

Today's trading reaffirmed the $1260 support level on SPX that proved so difficult to break through as resistance in December. The other significant change in this first week of trading in 2011 was the relationship of trading in RUT vs. SPX. RUT outperformed SPX consistently throughout 2010, but has lagged SPX several days this week. Take today as just one example. SPX dropped 0.9% from the open to its low around noon today and closed down $2 or less than 0.2%. But RUT dropped 1.9% from the open to its low and closed down $4 or about 0.5%. The SPX/RUT relationship has reversed. Is this a leading indicator of a turn downward as traders seek the larger blue chips for safety? I don't know. But it does suggest that trading delta neutral strategies on RUT may not be as difficult in 2011 as it was last year.

I removed the hedges on my Jan SPX iron condor this morning; at the close, this position was underwater by $1439 with a position delta = -$73 and position theta = +$245. Time decay is really starting to accelerate as we enter the last two weeks of this position's life. But the $1300 calls are still uncomfortably close to the index price (their delta = 17). However, SPX has traded upward over $76 since we established the Jan condor. So we are doing well to still be in the trade with a potential gain of over $2000 remaining. By contrast, the Feb RUT iron condor is very nicely positioned and stands at a P/L of +$540 with delta = -$28 and theta = +$90. The short $860 call stands at delta = 8 while the short $690 put stands at a delta of 9.

The first week of trading in 2011 is now over and what do we know? It appears we remain caught in a stalemate between the bulls and the bears. So far, neither camp has been able to control the game.

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Written by Dr. Duke

Created: 06 January 2011

It appeared the markets decided to pause today and wait for the jobs report tomorrow morning. SPX opened weakly this morning but erased some of those loses to close down modestly at $1274, down $3. RUT lost $4 to close at $792. But volume continues to track upward; 4.2 billion shares of the S&P 500 stocks traded today, up from yesterday and above the 50 dma at 3.3 billion shares. Trading volume was up 5% on the NYSE and up less than 1% on NASDAQ. It seems like the market is basically in bullish mode but there is some trepidation concerning tomorrow's jobs report. It is hard to predict the reaction; some of this good news is already priced into the market so the report will have to clear some hurdle of pleasant surprise to fuel the market higher. It will be interesting to see which way it goes.

My Jan SPX condor is sitting on the edge of adjustment with the $1300 calls sporting a 22 delta. This market appears to me to be incredibly bullish (too much so, I think, but that is another story). So I hedged the Jan SPX position with two Jan $1275 calls at $12.70. This brought my Greeks in line with delta = -$15 and theta = +$209. The Feb RUT condor stands at a P/L of +$220 with delta = -$27 and theta = +$91. So now we wait to see what happens tomorrow morning. Will all of these bulls run for the hills? Or will the bulls get the good news they seem to think is a near certainty? Or will the Fed hold the markets up regardless of the jobs numbers?

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Written by Dr. Duke

Created: 05 January 2011

The markets opened weakly this morning due to weakness in the European markets, but the surprising increase of 297k jobs reported by ADP appeared to boost the market. In addition, the ISM Services Index hit a multi-year high at 57.1 in Dec, surprising most analysts who were predicting numbers around 55. These reports have many traders feeling more optimistic about Friday's jobs report. The SPX increased $6 to close at $1277 while the RUT erased much of yesterday's loss to close at $795, up $9. Trading volume was marginally higher with an increase in trading volume of the S&P 500 to 3.9 billion shares; this number has increased every day thus far in this new year (not many data points, I admit, but...). Trading volume dropped 4% on the NYSE and increased 4% on NASDAQ.

During this morning's weakness, I removed the hedges on my Jan SPX condors because the delta of the $1300 calls dropped to 17. But then the market whipsawed me, so this position is underwater with delta = -$119 and theta = +$290. The Feb RUT condor stands at break-even with delta = -$43 and theta = +$96. Overall, the market appears very bullish, and the economic data is unmistakably improving. But the almost unanimous bullish sentiment is a little scary. Perhaps everyone is following the "Don't fight the Fed" rule?