Dr. Duke's Blog

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Written by Dr. Duke

Created: 20 November 2010

[I was speaking yesterday at the Traders Expo and thus this blog is late]. The markets opened down yesterday morning, somewhat in reaction to the strength of Thursday's markets. But by mid-morning much of the loss had been recovered and the major indexes closed for the day either even or up slightly. SPX closed up $3 at $1200 and RUT closed at $724, up $4. Concerns about Ireland's debt situation and China's efforts to rein in inflation continue to weigh on this market. Friday's price action was encouraging, suggesting that many traders saw the morning lows as a buying opportunity. Trading volume was down, in spite of options expiration. Trading in the S&P 500 stocks came in at 3.2 billion shares, below the 50 dma. Trading on the NYSE and on NASDAQ both dropped 10%.

My Dec iron condor on RUT stands at a P/L of +$560, delta = +$32 and theta = +$100. This position is nearly perfectly positioned and the theta/delta ratio is excellent. At times like this, the condor trader knows time is on his side.

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Written by Dr. Duke

Created: 18 November 2010

Wow! The market's concerns about Ireland and European sovereign debt sure went away in a hurry. The volatility of this market just continues to amaze me. SPX surged ahead $18 to close at $1197 and RUT closed at $721, up $13. And these gains were made on strong volume. Trading on the NYSE increased 30% and increased 12% on NASDAQ. The S&P 500 stocks traded 3.7 billion shares, above the 50 dma. The VIX dropped over three points to 18.75%. Such a strong move on increased volume with a large decrease in the VIX is certainly bullish, but one has to wonder about this market's fickle behavior.

My Dec iron condor is trading at about breakeven with a delta of +$3 and theta = +$66. I removed my put hedge today, but one still has to watch this market closely.

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Written by Dr. Duke

Created: 16 November 2010

The markets opened lower primarily over concerns over European sovereign debt, especially Ireland's situation. But unlike other recent days, there was no bounce in the first few minutes; the market plunged all morning and then traded largely sideways the rest of the day. SPX lost $19 to close at $1178. RUT closed at $705, down $15. This places both of these indexes well into the consolidation range in October that preceded the run-up from anticipation of the Fed's quantitative easing operations. The bad news is that there is room to drop before we hit support for SPX in the area of $1165 and RUT at approximately $690. Today's severe drop occurred with increased volume, which underscores the bearishness of the recent moves downward. Over 4.3 billion shares of the S&P 500 stocks traded today, well above the 50 dma at 3.6 billion shares. Trading on the NYSE increased a whopping 51% and it increased 19% on NASDAQ. Commodities were also down today, including a 2.3% drop in gold.

I closed half of the put spreads in my Dec iron condor on RUT and also hedged the position. At the close, this position stood at a P/L of +$265 with a delta = -$27 and theta = +$15. I will give this market a few days to settle down before entering new put spreads. I closed all of my GOOG spreads today, but I am still holding several AAPL positions. So now we watch to see where the bottom of this move may be.

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Written by Dr. Duke

Created: 15 November 2010

The markets opened up in positive territory this morning, buoyed by rising retail sales numbers for October. But the markets ran into the headwind of a rising U.S. dollar, strengthened in response to concerns over a potential EU bailout of Ireland. The major indexes traded largely sideways most of the day, but managed to stay in positive territory until the last hour of trading, when the bears took control. The SPX closed at $1198, down $1 while RUT closed at $720, up $1. The support level around $1200 on the SPX appears to be holding thus far in this correction, although it broke slightly below $1200 in the last 15 minutes of trading today. Trading volume of the S&P 500 stocks fell below the 50 dma to 3.2 billion shares. Trading on the NYSE was down 16% and was down 14% on NASDAQ. 

Consumer spending rose 1.2% in October but the Empire Manufacturing Index came in at -11.14, while analysts were predicting +11.7. This is the first negative decline of this measure of manufacturing activity in New York state since mid-2009. With the Fed's plans for another round of quantitative easing taking heat both domestically and internationally, one has to wonder if the markets are simply pricing in less quantitative easing?

My Nov condor position only consists of the 600/610 put spreads at this point; assuming they expire worthless, this position will result in a loss of $4,281 on 20 contracts. While a loss is always disappointing, we managed to constrain the loss to approximately a normal month's gain. In this way, we can maintain a positive return longer term. The Dec iron condor stands at a P/L of +$740 with delta = +$14 and theta = +$113. This position has a maximum potential gain of $4,900 since we rolled the original put spreads from 590/600 up to 660/670. My long positions in AAPL and GOOG are still holding support, but are on the edge of being stopped out by this pull back.

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Written by Dr. Duke

Created: 12 November 2010

When SPX dropped below $1200 this morning, I started to take the weakness of the past few days seriously. It traded as low as $1194 before strengthening a bit to close at $1199, off $14. RUT lost $12 to close at $719. The weak market began this morning with concerns that China would raise interest rates to combat inflation; that sent China's markets down and the fear spread across to us. The dollar actually traded down today, but that was ignored by the markets as was the improved consumer sentiment report from the University of Michigan. Trading volume was generally flat; 3.6 billion shares of the S&P 500 stocks traded, which is just above the 50 dma and down slightly from yesterday. Trading volume on the NYSE was up 8%, but was down 17% on NASDAQ. The fact that SPX didn't plunge through $1200 on increased volume is a positive sign, but we'll see what Monday brings. It appears that the sovereign debt worries are taking center stage again. The bullish effects of QE II appear to be forgotten; or one could argue that was already priced in with the early November rise in the markets. In any case, it is a little early to panic; we were overdue for some type of correction. I closed one of my aggressive long trades today (a Dec 310/320 risk reversal on AAPL) but otherwise have left my other long positions as is.

I closed the 770/780 call spreads in my Nov condor since those call spreads were less than two standard deviations OTM; I will allow the put spreads to expire worthless. The Dec condor stands at a P/L of +$320, delta = +$19, and theta = +$106.

Have a great weekend.

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Written by Dr. Duke

Created: 11 November 2010

Cisco's poor earnings announcement and cautionary outlook set the market back today, but the bulls didn't turn and run. The major indexes made steady improvements throughout the day. SPX was down as low as $1204 but closed at $1214, down $5. RUT behaved similarly, closing down $3 at $732. Trading volume was mixed with an increase in trading the S&P 500 stocks to 3.7 billion shares, a 13% decrease on NYSE, but a 33% increase in trading on NASDAQ (probably an artifact of the Cisco debacle). There were no economic data reports of any consequence today, so everyone focused on Cisco.

My iron condors on RUT in November and December are pretty much unchanged. The Greeks of the Nov position are pretty good with delta = -$52 and theta = +$130. The Dec condor is in excellent shape with delta = -$19 and theta = +$109. In spite of the pull back in the markets the last couple of days, I still see signs of a strong bullish sentiment among the traders. A common pattern of trading recently has been a weak open, followed by a slow recovery of much of the initial losses. So we may be correcting a bit, but the market's bias appears to be toward the upside. The bulls are still buying any pullbacks.

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Written by Dr. Duke

Created: 10 November 2010

It is dangerous to short this market. After yesterday's weakness, the markets opened lower this morning in spite of an improved unemployment claims report. One might have been tempted to go short. After all, I read everywhere that a correction is imminent. But the weakness was short lived; by noon the market was back in positive territory, headed for gains on the day. SPX closed at $1219, up $5 and RUT was even stronger, rising $9 to close at $735. Trading volume was flat to down with 3.5 billion shares of the S&P 500 stocks changing hands (right at the 50 dma). Trading volume on the NYSE was down 2% and volume was down 9% on NASDAQ. Initial unemployment claims came in at 435k, down 24k from last week and continuing claims dropped 90k to 4.3 million. This wasn't a great report, but it is starting to show a slow, but steady improvement. As data of slow improvement continues to accumulate and the Fed continues their QE II, it is hard to bet against the bulls.

Not much is changed for my condor positions. The Nov condor is slowly trimming its losses as time decay kicks in. The Dec condor is very well positioned with delta = -$19 and theta = +109. Next week, I am going out to Las Vegas for the Traders Expo; I hope to see you there. If you can't make the trip, my talk will be webcast.

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Written by Dr. Duke

Created: 09 November 2010

Strengthening of the dollar began yesterday and continued today. This pulled all of the major market indexes back a bit, although some buyers appeared in the last few minutes to recover some of the losses. SPX closed down $10 at $1213 and RUT lost $11 to close at $726. Trading volume was generally up, but trading in the S&P 500 stocks was flat from yesterday and remains below the 50 dma. However, trading on the NYSE increased 22% and also increased 22% on NASDAQ.

My Nov condor continues its underwater journey with delta = -$24 and theta = +$80. I rolled the put spreads up on the Dec condor to better position its Greeks with delta = +$4 and theta = +$111.

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Written by Dr. Duke

Created: 08 November 2010

Today was a slow day for economic reports or other market moving news. That combined with a stronger dollar held the bulls in check. The markets opened in negative territory and chopped sideways all day. SPX never fully recovered, closing down $3 at $1223. RUT recovered its losses and closed unchanged at $737. Trading volume reflected the malaise with a decline across the board. The S&P 500 stocks traded 3.2 billion shares, below its 50 dma. Trading volume declined 28% on the NYSE and dropped 14% on NASDAQ. But the underlying bullish strength was revealed in that bears were unable to create a sell-off; it was basically an even match between the bulls and the bears today. So while the bulls may be resting, they have not left the table.

My Nov condor sits at a delta = -$105 and theta = +$254. That large theta will continue to reduce the loss in this position, but it will be a loser for the month. The Dec condor sits at a delta = +$73 and theta = +$73, so the theta/delta ratio is a bit weak. However, the delta of the $780 calls is only 15. The put spreads are about 2.5 standard deviations OTM, so I may consider rolling them up this week.

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Written by Dr. Duke

Created: 05 November 2010

The S&P 500 set a record high for 2010 this morning and then promptly gave it all back and chopped back and forth all day. However, it surged near the end of the day to close at $1226 with a modest $5 gain. RUT gained $3 to close at $737. The nonfarm payrolls report was very positive with a gain of 151k jobs and a gain of 159k in private payroll jobs, but unemployment remains at 9.6%. The dollar strengthened today, which provided some of the head winds for the market's attempt to rise farther. Trading volume was flat to down today with a slight rise in the number of S&P 500 stocks traded: 4.7 billion shares. But trading dropped 5% on the NYSE and dropped 17% on NASDAQ.

When the markets pulled back this morning, I took that opportunity to close the rest of my Nov 740/750 call spreads and roll them up to 770/780. That brought the Greeks of the Nov position back in line with delta = -$42 and theta = +$102. The Greeks of the Dec condor stand at delta = -$75 and theta = +$78. The Greeks show the pressure being brought to bear on the 790/800 call spreads. The delta of the 790 calls = 16 so we may be adjusting this position soon if this bullish run continues.

It has been an interesting week in the markets. It seems like everyone, including me, had built up anticipation for the election results and the FOMC announcement, and then largely nothing happened... until the next day! So much for predicting the market's moves - have a great weekend.