Dr. Duke's Blog

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Written by Dr. Duke

Created: 04 January 2011

At the open this morning, it appeared like the markets were going to continue yesterday's bullish run, but the sellers stepped in and pressured the major indexes until early afternoon, when buying pressure began to erase most of the early losses. By the end of trading this afternoon, the SPX had almost made it back to the starting gate with a close down $2 at $1270. RUT recovered somewhat but didn't fare as well, closing at $786, down $13. Volatility peaked this morning and then gradually declined all afternoon to close at 17.4%, just above its open. Trading volume increased modestly over yesterday's high levels. 3.7 billion shares of the S&P 500 stocks changed hands; volume increased 7% on the NYSE and increased 5% on NASDAQ.  The FOMC minutes from the last meeting were released this afternoon but had little effect on trading; it was the same news as from previous meetings: the economy is recovering but painfully slowly.

My Jan 1210/1220 and 1300/1310 condor on SPX remains underwater due to the pressure on the call spread side; delta of the 1300 calls remains high at 19, so I left the hedge options in place. Position delta = -$6 and theta = +$213. The Feb condor on RUT positioned at 680/690 and 860/870 is standing nearly at break-even with delta = -$23 and theta = +$90. The deltas of the short options are around 9 to 11.

Traders will be watching the ADP payroll report tomorrow for clues about Friday's jobs report. Today's profit taking may reflect some caution going into that jobs report. The first week in January tends to be volatile as traders seek the market's trend for the new year.

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Written by Dr. Duke

Created: 03 January 2011

The fireworks started at the open on Wall Street this morning as traders went on a buying spree. Trading volume leaped up dramatically with over 3.6 billion shares of the S&P 500 stocks trading; the 50 dma stands at 3.3 billion shares. Volume jumped 89% on the NYSE and increased 445% on NASDAQ. Financial stocks led today's gains, but as you might surmise from the NASDAQ trading volume, tech stocks also had a big day. SPX closed at $1272, up $14; this is the highest level for the S&P 500 index since September of 2008. RUT outperformed SPX, just as it did all last year, closing at $799, up $15. One has to turn back the calendar to January of 2008 to see these levels in the Russell 2000 Index. The ISM Index for December came in at 57.0, slightly above November's 56.6. Friday's unemployment report may accelerate or temper this bullish trend. Many market analysts are hoping to see the unemployment rate show some decrease, no matter how small. Reactions to that report may set the tone for January's trading.

I had to make some adjustments in my Jan iron condor on SPX. I closed the 1150/1160 puts and rolled them up to 1210/1220. I also bought some February $1300 calls as hedges for this bullish trend. That brings my Greeks back into a better position with delta = -$15 and theta = +$227. Delta of the Jan $1300 calls is just under 21. The Feb RUT condor is still in good shape with a P/L of -$260, delta = -$44 and theta = +$87.

Happy New Year!

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Written by Dr. Duke

Created: 31 December 2010

Trading continued listlessly today in very low trading volume and was unexciting with the exception of the last few minutes. Sellers rushed into the market in the last 15 minutes of trading today, driving the major indexes down. However, buyers pulled the SPX back up to the unchanged mark at $1258. But RUT didn't outperform the SPX today as it has all year. RUT closed down $6 at $784. The benchmark S&P 500 index gained 13% in 2010 and NASDAQ gained 17%, but RUT gained 25% this year, an impressive gain for a broad based market index. One of the key stocks powering the NASDAQ run was Apple Computer, gaining 53% in 2010.

There was no significant economic news today, but next week has a full economic report schedule, culminating in the jobs report next Friday. Traders' reaction to that report may set the tone for next year's trading. The bears can make a strong case for a coming correction, citing basic economic issues both here and in Europe. In addition, many technical indicators suggest an overbought market. But one of the cardinal rules in this business is, "Don't fight the Fed", and the Fed is continuing to fuel this market via their quantitative easing program. Accordingly, I closed my GS iron condor today for a 17% gain. The financials have led this December rally and if the bull market is to continue in January, that GS call spread could be in trouble. Better to lock in a nice gain rather than risk a loss. This position was recommended in one of my Trading Group meetings; those recommendations gained 45% in 2010. You can examine the trading record in detail by downloading the file in our Free Downloads section of the web site.

My Jan iron condor on SPX continues to work off the red ink from repositioning a couple of weeks ago. The position delta = -$81 and theta = +$172, so the large positive theta will continue to work in our favor, but the call spreads are just one standard deviation OTM while the put spreads are two standard deviations OTM. With 20 days left to expiration, we are still exposed to a continued bullish run on SPX. The Feb RUT 680/690 860/870 condor stands at -$500, delta = -$24 and theta = +$89. In the short time I have been in this trade, the IV of the options in these spreads has increased about 3 points. Thus, the position remains underwater even though the spreads are well OTM. This is an excellent illustration of the negative vega of the iron condor spread.

My new book, No Hype Options Trading, is now available on Amazon. I will not be carrying it on my Online Store because I can't compete with Amazon's pricing (no wonder Borders is going out of business!), so order a copy on Amazon.

Thanks to all of you who have supported me this year. You have my best wishes for a joyful, healthy and prosperous new year. Happy New Year!

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Written by Dr. Duke

Created: 30 December 2010

We received some unequivocally good economic news today, but the markets were not impressed. Does this signal the long awaited correction is imminent? Or is no one left in the offices to react to the news?

SPX dropped $2 to close at $1258 and RUT essentially closed unchanged at $790 (down $0.52). Trading volume fell again today with 1.4 billion shares of the S&P 500 stocks changing hands. Volume fell 2% on the NYSE and fell 4% on NASDAQ. Initial unemployment claims fell to their lowest level in about two years at 388k, while continuing unemployment claims increased by 57k to 4.1 million. The Chicago PMI came in at 68.6, an increase from last month's 62.5 and pending home sales for November increased 3.5%. But this good news wasn't enough to move this holiday market. I am not reading too much into that because so few traders are in the offices at this point in the holidays.

My Jan SPX iron condor improved its position somewhat with a P/L of -$1139, delta = -$90 and theta = +$122. The Feb iron condor on RUT stands at -$500, delta = -$27 and theta = +$87. Will anyone be left to trade tomorrow?

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Written by Dr. Duke

Created: 29 December 2010

The markets traded modestly higher today on low trading volume, but a late sell-off in the last few minutes of trading erased most of the gains. SPX closed at $1260, up about $1. RUT gained less than a dollar to close at $790. Trading in the S&P 500 stocks actually declined from yesterday's already low levels to 1.5 billion shares. Trading dropped 7% on the NYSE and dropped 1% on NASDAQ.

My Jan SPX iron condor stands at -$1799 with delta = -$104 and theta = +$145. This position is beginning to be pressured on the call side with delta of the $1300 calls at 16. The Feb iron condor on RUT stands at a P/L of -$600 with delta = -$38 and theta = +88. This condor is well positioned so far with the $860 call delta at 12 and the delta of the $690 puts at 11.

The steady push upward by this market even during these low volume holiday weeks is remarkable. It certainly appears that next week may usher in a strong bull market to begin the new year. But the universal bullish attitude I am hearing and reading worries me from a contrarian perspective. However, this may be the classic, "Don't fight the Fed" situation. QE II does appear to be pushing this market higher. Whether you or I agree with the Fed's tactics is really irrelevant. I have a couple of stock condors and one bearish trade in my directional portfolios. I think I may close them this week before everyone comes back from the holidays and begin to push this market in earnest.

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Written by Dr. Duke

Created: 28 December 2010

The markets meandered sideways on very low volume today. Minimal economic news was reported. The Case Schiller Housing Price Index fell 0.8% in October. The Conference Board Consumer Confidence Index dropped to 52.5 in December from 54.3 in November. This surprised analysts who were looking for a value of 56.1. But none of this news seemed to have much effect on the markets. The SPX gained $1 to close at $1259 while RUT lost $3 to close at $789. Obviously, most traders are on vacation. My Jan SPX iron condor position is essentially unchanged at a P/L of -$1479 with delta = -$100 and theta = +$116. The Feb RUT iron condor stands at a P/L of -$600 with delta = -$29 and theta = +$80. Enjoy the relaxing week; presumably, the action returns next week.

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Written by Dr. Duke

Created: 27 December 2010

China raised interest rates to retard inflation and traders reacted negatively to this news because it raised concerns about the global economic recovery stalling. However, the markets slowly traded upward most of the day and all of the major indexes finished in positive territory except for the Dow. SPX closed up less than one dollar at $1258. RUT gained $3 to close at $792. Surprisingly, trading volume declined even further from Thursday's low pre-holiday volume. About 1.6 billion shares of the S&P 500 stocks traded. Trading declined 24% on the NYSE and dropped 14% on NASDAQ.

My Jan SPX iron condor stands at a P/L of -$1,979 with delta = -$91 and theta = +$137. The Feb RUT iron condor stands at a P/L of -$700 with delta = -$36 and theta = +$83. It has been surprising how the indexes continue to climb on such weak volume. Bullishness is common, which concerns me. The big institutional players do not appear to be "in the game", so the question remains as to which way they will push this market when they return in volume.

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Written by Dr. Duke

Created: 23 December 2010

As everyone left the offices on Wall Street, trading volume collapsed and the markets largely traded sideways with minor losses. The SPX lost $2 to close at $1257 while RUT closed at $789, down $2. Only 1.9 billion shares of the S&P 500 stocks traded today, well below the 50 dma of 3.6 billion shares. Trading volume dropped 18% on the NYSE and was down 21% on NASDAQ. Economic news today was a mixed bag. Durable goods orders dropped 1.3% in November, but new home sales increased to 290k from last month's 275k. Initial unemployment claims dropped a bit to 420k from last week's 423k while continuing unemployment claims dropped by 103k to 4.064 million. The University of Michigan Consumer Sentiment survey increased a bit in December to 74.5 from 74.2. This collection of economic data was insufficient to stimulate any real action in the markets; everyone was already on their way out the door. My Jan iron condor on SPX continues to meander along at the edge of adjustment with delta = -$94 and theta = +$166. Earlier this week, I established a Feb RUT iron condor at 680/690 and 860/870 for a credit of $3300 on 20 contracts. The position delta = -$33 and theta = +$78. Both short strikes are standing at about 11-12 delta.

The markets are closed tomorrow, so all of our positions are just losing time value while you relax with the family. Whether that be our ITM debit spreads on GOOG and AAPL or our iron condors, time is on our side. Enjoy the holiday. At this time of the year, it is easy to think of the family members who are gone; remember to be thankful for the family we have with us.

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Written by Dr. Duke

Created: 22 December 2010

Markets traded higher today on flat volume. The SPX closed at $1259, up $4 while RUT was unchanged at $791. Trading volume was essentially unchanged from yesterday. Traders were encouraged with a reported 2.6% increase in GDP for the third quarter and a 5.6% increase in existing home sales in November (4.68 million). Two questions are prominent in my thinking about this market: when the traders return to their desks in January and volume approaches "normal" levels, in which direction will the market trend? And what event will trip up this bull run? Every talking head I hear on CNBC is bullish; they just argue over how high the markets will go in 2011. When everyone is on one side of the boat, it worries me. Although I have many bullish trades ongoing, I have a hair trigger on to take them out. In the meantime, my Jan SPX iron condor continues to be underwater with delta = -$84 and theta = +$155. The theta/delta ratio is still good, but we are nearing the limits on the call side before we have to close or adjust. It seems like a flat, sideways trading day should be in the works; after all, hasn't everyone left the office?

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Written by Dr. Duke

Created: 21 December 2010

Even as the offices begin to thin out for the holidays, the markets hit new 2010 highs today. SPX climbed $8 to close at a new high for the year of $1255. In fact, this level has not been seen on SPX since September of 2008. RUT gained $8 to close at $791, also a new 2010 high. RUT has traded much stronger than the blue chips this year and the current price level matches prices of December 2007. Volume continues to drop off with 2.8 billion shares of the S&P 500 stocks trading; this is about one billion shares below the 50 dma. Trading on the NYSE dropped 5% and trading on NASDAQ dropped 2%. Today was a slow day for economic data. Several positive earnings reports buoyed the market sufficiently for traders to overlook concerns about credit downgrades of the sovereign debt of Portugal and Greece. It appears traders vacillate between two states of mind: 1) The US is part of a global economic system and European sovereign debt does affect us, and the 2) The US economy is recovering and remains one of the strongest economic engines in the world - just look at those earnings reports.

Many technical indicators have been flashing overbought for some time but the market keeps grinding out steady gains. The gains this week have surprised me; I expected the markets to largely trade sideways as the holidays get into full swing and the offices empty. My Jan SPX condor remains underwater with delta = -$85 and theta = +$106; the delta of the 1300 calls = 16. I keep expecting this market to slow its steady upward climb, but it keeps on chugging along.  But we just trade what the market gives us, not what we expect.