Dr. Duke's Blog

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Written by Dr. Duke

Created: 04 November 2010

Yesterday it appeared the markets had priced in much of the Fed's announcement of further quantitative easing, but traders must have reconsidered overnight because the bulls were out in force this morning. SPX jumped up to about $1212 within a few minutes of the open and then just slowly gained all day to close at $1221, up $23. This matched the previous high set in April this year for the S&P 500. Can it break through that high? RUT ran up $18 to close at $733, below its high this year at about $745. Trading volume increased across the board. Over 4.5 billion shares of the S&P 500 stocks traded today, well above the 50 dma at 3.5 billion shares. Volume was up 18% on the NYSE and up 26% on NASDAQ. Today's strong run came in the face of an increase of 20k in initial unemployment claims, but continuing unemployment claims dropped 42k to 4.3 million.

My Nov condor is hurting in the face of this bullish onslaught. I closed half of my 740/750 calls and rolled them up to 770/780 and hedged the position with some Nov $720 calls. The position Greeks are still weak with delta = -$99 and theta = +$113. My Dec condor is faring much better, standing at a P/L of +$460, delta = -$59 and theta = +$83. But my call spreads on AAPL and GOOG are doing very well - testimony to diversification.

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Written by Dr. Duke

Created: 03 November 2010

Traders were generally on the sidelines this morning as they waited for the FOMC announcement this afternoon. Stocks mostly traded sideways and down before the announcement in the afternoon. SPX closed up $4 at $1198 after briefly trading down to its recent favorite number, $1185. RUT closed at $715, up $2 on the day. In general, the day's trading was uneventful; apparently, the election results and the FOMC announcement were "as expected". Trading volume was up across the board; the S&P 500 stocks traded 3.5 billion shares, equal to the 50 dma. Trading on the NYSE was up 23% but only up 3% on NASDAQ. The economic data announced today was generally positive but was ignored as traders waited on the Fed announcement. ADP reported a gain of 43k jobs in October, a big improvement from the loss of 2k reported for September. The ISM Services Index reported out at 54.3, a small improvement over September's 53.2, and factory orders for September rose 2.1%. The Fed will be buying as much as 600 billion dollars worth of treasury bonds through the second quarter of 2011. However, the announcement also included the usual cautionary language that the pace of purchase will depend on the committee's judgment of the economy.

My Nov condor remains at the high end of its range with delta = -$158 and theta = +$221. December's position is up about $1,100 and has a delta of -$29 and a theta of +$75 so it is well positioned. The much anticipated day in the markets is over without much happening - but that's good news.

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Written by Dr. Duke

Created: 02 November 2010

The markets appeared to be anticipating good news from the election results and traded up somewhat today. But tomorrow may be  a very different day. We will start with the ADP employment report before the open coupled with the election results, and then the FOMC announcement in the afternoon. It could be a very volatile day. SPX closed today at $1194, up $9 and RUT gained $14 to close at $713. Trading volume was basically flat with three billion shares of the S&P 500 stocks trading; trading was down 6% on the NYSE and up 1% on NASDAQ.

My Nov condor has a delta of -$142 and theta = +$234. The theta/delta ratio is good, but our price risk, as represented by delta, is too large. The Dec condor has a delta of -$31 and theta of +$92. So its theta/delta ratio is even better but the price risk is much more manageable.

Tomorrow should be interesting.

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Written by Dr. Duke

Created: 01 November 2010

The markets were initially encouraged by some positive economic data, but the bears pulled the market back to end the day essentially unchanged. SPX closed up less than a dollar at $1184 while RUT dropped $5 to close at $699. Trading volume was flat to down with 2.9 billion shares of the S&P 500 stocks trading and a decline of 1% on the NYSE; trading volume on NASDAQ dropped 8%. The Oct ISM Manufacturing Index reported out at 56.9, a big jump from last month's 54.4. Construction spending is up 0.5% for September, but personal income dropped 0.1% and personal spending rose 0.2%. So the economic data continues along a flat to slightly improving line, but the markets are stalled until after the election results and the FOMC report Wednesday. If you have a prediction for either of those events, it isn't much help in predicting the market's response. The market may sell the news in either case. If the Fed waffles on QE II, the markets may sell off strongly since much of the recent gains have presumed additional quantitative easing. It is an excellent time to be delta neutral. I looked at the possibility of a straddle on the indexes today, but found that the markets have priced in large moves. The RUT straddle requires a move above $736 or below $664 to be profitable; similarly the SPX straddle requires a move of over $41 up or down. If I were a speculator, I might sell the straddle...

My Nov iron condor on RUT at 600/610 and 740/750 stands at a P/L of -$1,286, delta = -$94 and theta = +$217. The call spreads are one standard deviation OTM while the put spreads are over two standard deviations OTM. The Dec iron condor on RUT at 590/600 and 790/800 stands at +$440, delta = -$2 and theta = +$81. Both condors are in pretty good shape although the Nov condor is exposed if the events this week precipitate a strong bull run. The wait continues.

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Written by Dr. Duke

Created: 29 October 2010

Most traders have already taken their positions in advance of the elections and the FOMC decision next week, or they are sitting on the sidelines. Either way, the listless sideways trading continued today. SPX closed virtually unchanged at $1183 while RUT rose $2 to close at $703. Trading volume was flat to down with 3.1 billion shares of the S&P 500 stocks trading; the 50 dma = 3.5 billion shares. Trading on the NYSE was down 4% but trading was up 4% on NASDAQ. Third quarter GDP grew 2.0%, up a bit from the second quarter at 1.7%. The Chicago PMI came in at 60.6 for October, essentially unchanged from September. The University of Michigan consumer sentiment survey reported 67.7 for October, down only slightly from September's 67.9. So the economic data fit this market: basically sideways.

As you might expect in this market, my condor positions are largely unchanged. The Nov condor sits at a delta of -$107 and theta = +$197 while the Dec position has a delta of -$15 and theta = +$78. The price risk of the Nov position is a bit high, although the theta/delta ratio is good. The Dec condor is nicely balanced.

So we wait to see what happens next week: the election results and the FOMC decision on Wednesday and then the jobs report on Friday; it promises to be a volatile week. Have a great weekend.

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Written by Dr. Duke

Created: 28 October 2010

The decline in initial unemployment claims appeared to give the market a boost this morning, but it wasn't enough to spur a move out of this sideways trading range. SPX appears to be tied to roughly $1185; over the past several days, it keeps running up and down but coming back to close at or near $1185. Today SPX closed at $1184, up less than a dollar on the day. RUT dropped $3 to close at $701. Initial unemployment claims dropped by 21 thousand to 434k and continuing claims dropped 122 thousand to 4.36 million. These changes are probably close to being within the error of measurement, but the direction is still encouraging.Trading volume was flat or declining today with 3.4 billion shares trading in the S&P 500 stocks. Trading on the NYSE was down 1% and also down 1% on NASDAQ.

My condor positions are essentially unchanged. The Nov condor's position delta stands at -$94 and theta = +$195. The Dec condor looks even better with a delta of -$6 and theta = +$82. Over the past two to three weeks, the market is testing our patience as traders. You may be waiting for your stock to break out one way or the other so you can initiate the planned trade; in the case of our condors, it is tempting to lock in some of the gains in our put spreads. In times such as these, it is very important to follow your rules and not force the trade. Sometimes, traders get impatient and just feel compelled to do something! That rarely turns out well. Patiently wait for the trade to set up according to your system. I expect this market to continue to churn and go nowhere until next Wednesday. Then, who knows? Be sure your stop losses are in place. A disappointment from Bernanke could get ugly. And the election results could drive the market either way, regardless of who wins. In any case, next Wednesday will be a busy day in the markets.

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Written by Dr. Duke

Created: 27 October 2010

One might have expected a bullish day after September's durable orders rose 3.3% (was down 1% in August) and new home sales rose 7% to 307k. But that wasn't to be; the market sold off and the SPX dropped as low as $1172 before rebounding to close down $3 at $1182. RUT dropped $3 to close at $704. So the range bound behavior continues. Neither the bulls or the bears can take charge for long before the other group pulls them back. This underscores what I wrote about yesterday: the markets are waiting on the election results and the FOMC announcement next week. Trading volume was flat to modestly up; trading in the S&P 500 stocks was flat at 3.6 billion shares; Trading volume was up 7% on the NYSE and was up 5% on NASDAQ.

After RUT dropped to $696 today, I removed the Dec call hedges in my Nov iron condor position. Of course, the market bounced back and the Nov $740 call delta is back up to 21. The position delta is a bit higher than I would like at -$107 and theta = +$184. The Dec condor is in near perfect shape with delta = -$14 and theta = +$78. The Dec position is enjoying this range bound action, but the Nov position's call spreads are a bit too close to the fire for comfort. We may have to reapply our hedges tomorrow. We will see what the market brings us.

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Written by Dr. Duke

Created: 26 October 2010

The markets opened down this morning but quickly recovered and traded largely sideways to close essentially unchanged for the day. SPX closed unchanged at $1186 while RUT closed down $1 at $707. The action yesterday and today on SPX is interesting. Yesterday, the bulls tried to take SPX to new highs but were pulled back to $1186, while the bears attempted to pull the SPX down at the open today but the bulls pulled the index back up to close at $1186. Unless something significant occurs in the ongoing earnings report action, I expect the market to trade without serious direction until after the election and the FOMC report next week. The VIX jumped at the open to 20.5% on the downward market move, but didn't return as the markets recovered; it closed at 20.2%, suggesting some hedging by the large portfolio managers. Trading volume was flat to mixed with a 3% drop on the NYSE and a 10% increase on NASDAQ. Trading in the S&P 500 stocks was flat at 3.5 billion shares, right at the 50 dma.

The Case Schiller housing price index increased 1.7% in August, down from the 3.2% increase in July, but it is moving in the right direction. Consumer confidence rose to 50.2 in Oct from 48.6 last month, and the FHFA Home Price Index rose 0.4% in August. We are seeing several data points suggesting a modest recovery for real estate, or at least no further deterioration.

My condor positions are largely unchanged. The Nov condor remains hedged with Dec calls since the Nov $740 calls are still at a delta of 23; the position Greeks are good with delta = -$54 and theta = +$127. The Dec condor has a delta of -$22 and theta = +$77. Rolling up the put spreads is a temptation in both of these positions, but we may need that extra safety margin on the downside. My fear is that the Fed will disappoint the market next week, and that could get ugly. For now, I see more risk to the downside than the upside for my condors. But I am not supposed to be making predictions, am I?

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Written by Dr. Duke

Created: 25 October 2010

The markets were fueled this morning by a surprising 10% increase in the sales of existing homes for September. But the increase was short lived and most of the gains were lost as the markets pulled back and traded sideways most of the day. The SPX closed at $1186, up $3 after trading as high as $1196. RUT closed up $4 at $708. Trading volume was up from Friday; 3.6 billion shares of the S&P 500 stocks traded, just above the 50 dma at 3.5 billion shares. Trading was up 27% on the NYSE and up 4% on NASDAQ. SPX has been trading in the range of $1165 to $1185 for the last 2-3 weeks. Today's early rise in SPX brought out the bears to pull it back down into this trading range. Since much of the recent bullishness has been driven by expectations of the Fed initiating another round of quantitative easing, perhaps the markets will trade sideways until the next FOMC announcement November 3. And, of course, the election results constitute another potentially market moving event; so November 3 is shaping up to be a volatile day in the markets with election results in the morning and the Fed announcement in the afternoon.

My Nov condor on RUT continues to sit in the middle of the adjustment range on the call side with the delta of the Nov $740 calls at 25. This position is hedged with Dec $740 calls and has a position delta of -$57 and theta = +$77. The Dec iron condor on RUT stands at a P/L of -$120, delta = -$24 and theta = +$115. We may see the markets largely trade sideways until November 3. But we will trade our condors on the basis of what the market does today, not what we think it should do.

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Written by Dr. Duke

Created: 22 October 2010

We have just solved some technical difficulties that prevented my entering my blog for the past two days.

So have a good weekend and I will hopefully be back here on Monday.