Dr. Duke's Blog

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Written by Dr. Duke

Created: 20 October 2010

That pull back was certainly short lived. The SPX closed up $12 at $1178; that was almost the mirror image of yesterday's market when it opened at $1179 and fell to $1166. Today's open was $1167. It would appear the bulls are back in charge and the QE II train is still running. The dollar lost ground today and that certainly helped stocks somewhat; and another batch of largely positive earnings reports was helpful as well. RUT behaved similarly, closing up $8 at $702 (yesterday's open was at $702). The Fed's Beige Book was almost the only significant economic news and the market just yawned. Trading volume was down from yesterday's highs but still at pretty high levels. 4.3 billion shares of the S&P 500 stocks traded; that is down from yesterday but still above the 50 dma. Trading volume declined 13% on the NYSE and dropped 9% on NASDAQ.

This market reversal caught my Nov condor without its hedge (closed yesterday). As Yogi would say, "it's like deja vu all over again." It seemed we were always getting whipsawed with our hedges in our October condor. I reapplied the Dec call hedges and reduced the position delta to a manageable -$35 and yet theta remains high at +$111.

So we wait to see if the euphoria over positive earnings and the prospect of further quantitative easing will continue to fuel this market. That doesn't seem reasonable to me, but we play what the market gives us, not what we believe should be happening.

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Written by Dr. Duke

Created: 19 October 2010

The pull back many of us have been expecting for some time finally occurred today. Financial stocks led the downward trend and a strong dollar contributed as well. Earnings reports from AAPL and IBM were both rather positive, but were not sufficient to prevent a bout of profit taking. That tended to set a negative tone to the market at the opening this morning. Housing starts for September were up modestly to 610k from last month's 608k. Building permits dropped from last month's 571k to 539k in September. So neither the economic news or the earnings reports were clearly the cause for the market's tumble. Many indicators have been pointing to overbought for some time and it finally tipped over today. SPX lost $19 to close at $1166 while RUT closed at $694, down $16. Stocks traded higher in the last few minutes of trading, a positive sign for the day. Trading volume was up across the board with 4.7 billion shares of the S&P 500 stocks changing hands. Trading on the NYSE was up 32% and was up 28% on NASDAQ. So we had a big down day on increased volume - that may suggest more down days in front of us.

I sold the Dec calls hedging the Nov iron condor position this afternoon as the delta on my short Nov calls hit 16. This position now stands at a P/L of -$2,306 with delta = -$70, and theta = +$150. The cost of my "insurance" was $780, but this position still has the potential for a $2,574 profit. The hedge served its purpose by keeping us in the game now that the market has pulled back. Our theta/delta ratio is quite strong. If the market continues to pull back, this position will be even stronger. If the market appears to stabilize, I will initiate the Dec condor position this week.

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Written by Dr. Duke

Created: 18 October 2010

The futures were weak this morning and the market opened down initially, but quickly recovered and steadily gained throughout the day. The SPX closed at $1185, for a gain of $9. SPX appears to be on cruise control towards the April high of about $1220. RUT also gained on the day, up $7 to close at $710. RUT's April high was at about $745. VIX spiked up early, but settled to close at 19.1%, about where it closed yesterday. Trading volumes were down from Friday's highs, but still above average. Trading in the S&P 500 stocks came in at 3.9 billion shares, well above the 50 dma at 3.4 billion shares. Trading on the NYSE was down 31% from Friday and trading on the NASDAQ was down 22%. Industrial production declined 0.2% in September and capacity utilization was flat at 75%.

My November iron condor on RUT stands at a P/L of -$2386, with position delta of -$45 and theta = +$85. The delta of the short $740 calls rose to 27 today.

AAPL continues to run skyward, closing at $318 today; that forced me to close my Jan 2011 270/300/330 butterfly, locking in a 51% gain. My best guess is that AAPL will eventually pull back and continue to trade within the break-evens of this butterfly, but I was reluctant to watch the profits decline any further. I didn't want to let a 51% gain get away while I was waiting on a pull back. As it turned out, analysts were disappointed with AAPL's sales of the iPad, so my butterfly would have been worth a lot more tomorrow, but I didn't see a disappointing earning announcement in the cards.

Check out the Traders Expo in Las Vegas November 17-20. I will be speaking on the 19th, but much better known speakers than myself will be there. The organizers  have created an excellent program. And, best of all, you can register for free! Please make it a point to introduce yourself after my talk; I would enjoy meeting any or all of you.

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Written by Dr. Duke

Created: 15 October 2010

All eyes were focused on Bernanke this morning, but nothing really new was revealed in his speech. The FOMC appears to be prepared for another round of quantitative easing, but many qualifiers are still sprinkled through the language. The markets appeared to be buoyed by this at the open as the SPX spurted to $1181, but then it pulled back and traded sideways through most of the day, closing up $2 at $1176. For those of you trading the SPX, it settled at $1183.67, reflecting that strong push early this morning. Homework question for you: how can the SPX settlement price come in higher than the high for the day? RUT behaved similarly, but closed down $2 at $703. RUT's settlement price was just posted a few minutes ago: $712.93. That represents an unusual divergence from Thursday's close to the settlement price for RUT; it has averaged only $4.42 all year (this was over $8).

One unusual note to today's market action: generally the major indexes traded sideways and closed largely unchanged for the day. However, trading volume was generally up and hit record highs of 5.2 billion shares in the S&P 500 stocks; these stocks have not traded at that level since July 1. Trading on the NYSE was up 27% and was up 10% on the NASDAQ.

Economic news was minimal and didn't seem to have much effect on the markets today. The NY Fed Manufacturing Survey came in at 15.7 for Oct, increased from September's value of 4.1. The University of Michigan Consumer Sentiment Survey reported 67.9 for October, down slightly from the previous month's 68.2. CPI rose a mere 0.1% for September.

My Oct iron condor clobbered me for a 60% loss. As I looked back over this position's history, two areas bled red ink. One was the cost of my hedge options, or my insurance. But my post audit revealed that I followed my rules for starting and ending those hedges; the RUT just conspired to trade up and down through my adjustment trigger value, resulting in many hedges and many small losses, accumulating to a large loss. So this was simply one of those "costs of doing business" in trading. However, the other area of red ink was entirely my mistake. After rolling my call spreads up out of danger in late September, I realized the position was a modest loser at best. I should have left it at that and taken the loss. Instead I rolled my calls down and the puts up in an attempt to salvage a gain from the month. The market's euphoria over QE II then proceeded to roll over my call spreads; that was bad timing for my position, but I should not have been there in the first place. Always evaluate your trading after the fact and learn from your mistakes. But don't beat yourself up too badly.

The Nov RUT iron condor is well positioned at a P/L of -$2,746, position delta of -$30 and position theta of +$85. The theta/delta ratio is excellent. We are hedged with Dec $740 calls. If RUT trades higher, we will roll the calls up, but leave the Dec calls in place to continue their gains. If RUT pulls back, we will sell the Dec calls.

Congratulations to those of you who played the GOOG straddle. I have the Nov 510/520 call spreads - merely a 40% trade rather then the 125% that was possible from the straddle.

Enjoy your weekend.

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Written by Dr. Duke

Created: 14 October 2010

The market shrugged off the increase in unemployment claims this morning and initially traded higher. This happened, of course, because I still had some Oct 700/710 call spreads open. As soon as I closed those spreads and took my loss, the market began to trade lower (it wasn't quite that bad, but you know the feeling). RUT traded as low as $699 before recovering to close at $705, down $2 on the day. SPX hit $1167 before retracing much of its loss to close at $1174, down $4. Trading volumes were flat to down a bit from yesterday's high levels. About 4.5 billion shares of the S&P 500 stocks changed hands, flat from yesterday, but both of these days were well above the 50 dma at 3.4 billion shares. Trading on the NYSE was down 4% and was down 11% on NASDAQ. Initial unemployment claims rose 13 thousand to 462k while continuing claims dropped 112k to 4.4 million. The PPI rose 0.4% in September, same increase as last month. Given the general absence of significant market moving news and the weakness in the financial stocks, the fact that the markets were able to recover most of today's losses was very bullish behavior. Personally, I don't fully appreciate the case for the bulls, but they appear to be controlling the market.

My Oct iron condor on RUT is almost completely closed; I have allowed the 610/620 put spreads to enter expiration to expire worthless. I closed the remaining 700/710 call spreads today. I have not tallied all of the damages yet, but the Oct position was a big loser; I will report the sordid details tomorrow with my post audit of the trade. The Nov iron condor has been hedged with Dec $740 calls and I rolled the initial 520/530 put spreads up to 600/610. The P/L for the position is underwater by $3k with delta = -$26 and theta = +$80. The delta of the Nov $740 calls stands at 27 so we are far from out of the woods with this position. Today's spike up in IV pushed the P/L down quite a bit.

So now we wait to see who wins the tug of war tomorrow.

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Written by Dr. Duke

Created: 13 October 2010

Intel's better than expected earnings appeared to get this market started on an upswing this morning that lasted nearly until the close. Weakness in the dollar may have fueled part of this move. It will be interesting to see if the unemployment claims report in the morning does anything to dissuade the bulls. It appears of late that all news is seen as positive. SPX ran up $8 to close at $1178 while the RUT was even stronger, rising $10 to close at $706. Trading volume was up again today with a 26% increase on the NYSE and an 18% rise on NASDAQ.

AAPL broke through $300 per share to set a new high. My Jan 2011 270/300/330 butterfly is now up 72%. However, that is balanced by the bath I am taking in my Oct iron condor. I closed out another five of my 700/710 calls today; I will close the rest tomorrow. I added Dec $740 call hedges to my Nov iron condor and also rolled the puts from 520/530 to 600/610. That position now stands at a position delta = -$32 and theta = +$75, so the adjustments helped the Greeks to get in a better position.

So now we watch to see if the bulls can continue the charge.

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Written by Dr. Duke

Created: 12 October 2010

The markets opened lower this morning but quickly recovered most of that early loss and traded sideways until after the FOMC minutes were released. The language is pretty vague, but discussions of further quantitative easing were discussed as perhaps being required "before long". But traders grabbed that life line and bought stocks, assuming that QE II will not only sail, but have the desired effect.  Economists are divided, but many believe the effects on the economy will be modest. SPX traded up $4 to close at $1170, while RUT closed at $696, up $4. Trading volume also shot up across the board with a 13% increase on the NYSE and a 26% increase on NASDAQ. Trading volume in the S&P 500 stocks hit 3.6 billion shares, above the 50 dma.

My Oct condor continues to limp along; absent a market pull back, I will be forced to close the call spreads tomorrow. The Nov condor stands at a P/L of -$1,486 with delta = -$103 and theta = +$83. Another up day on RUT will necessitate some adjustments to this position.

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Written by Dr. Duke

Created: 11 October 2010

The markets opened down this morning and after chopping sideways for a couple of hours, they headed higher. But a large sell-off late in the day brought the major indexes back to where they started. SPX closed unchanged at $1165 and RUT closed at $693, also unchanged for the day. The SPX candlestick for today was the classic doji, often suggesting a turning point based on the indecision or stalemate between the bulls and the bears suggested by the day's trading pattern. However, trading volume fell way off, making it dangerous to base any predictions on today's price movement. Trading in the S&P 500 stocks dropped to 2.5 billion shares, way below the 50 dma at 3.3 billion shares. Similarly, trading on the NYSE was down 12% and down 23% on NASDAQ.

My Oct iron condor on RUT continues its underwater journey, although each day is helping the position due to its +$325 theta. The Nov condor is in fairly good shape with a P/L of -$1310, delta = -$84 and theta = +$92. The fact that delta is of the same order of magnitude as theta shows that the position is on the edge of requiring adjustment if RUT trades higher.

I think traders are still trying to sort out whether Friday's jobs report was bad news or good news. In any case, today's market couldn't find a direction.

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Written by Dr. Duke

Created: 08 October 2010

Initially the market faltered on the news of a loss of 94 thousands jobs and unemployment remaining at 9.6% in the September nonfarms payroll report. But then the consensus view saw this bad news as good news because it would likely prompt the Fed to further intervene via additional quantitative easing. This viewpoint sent the dollar plunging and that in turn helped the stocks rally strongly. It was certainly a surprising interpretation of the jobs report for me - but, I don't claim to be able to predict the market's twists and turns. The SPX rallied $7 to close at $1165 while RUT ran even harder, closing at $694, up $10. Trading volume was flat to modestly higher, depending on the exchange. Volume was only up 2% on the NYSE, but it was up 9% over at NASDAQ. Trading in the S&P 500 stocks was flat at 3.2 billion shares, just below the 50 dma.

My limping Oct condor was crushed by today's move. I didn't help matters when I removed the long Nov hedges this morning as the market dropped. I closed half of my 700/710 call spreads and will close the remaining call spreads next week. The only remaining question is to determine the size of the loss for October. I also removed the hedges on my Nov condor, but that was of minimal consequence for that position. However, by the end of the day, the short Nov $740 calls closed with a delta of 21, so this position will require more surgery next week, absent a pull back.

Enjoy your weekend.

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Written by Dr. Duke

Created: 07 October 2010

Markets traded mostly sideways today with most traders focused on the nonfarm payroll report tomorrow morning. Initial unemployment claims reported essentially flat week to week at 445k and continuing claims decreased by 48k to 4.5 million. However retail sales appear to be making solid gains and that news appeared to offset the lack of improvement in the unemployment claims data. RUT lost $1 to close at $684 while SPX lost $2 to close at $1158. Trading volume declined across the board with 3.2 billion shares of the S&P 500 stocks changing hands. Trading on the NYSE dropped 5% and it declined 12% on NASDAQ. The dollar recovered somewhat today and that pressured gold prices. With bond yields at record lows, there is a lot of money on the sidelines considering whether it is safe to buy stocks. It is impossible to predict what piece of news, or more importantly, the interpretation of that news, will push this market one way or the other. Alcoa's earnings announcement certainly wasn't very encouraging with a 21% drop in earnings; however, they beat analyst expectations, so that may be a positive boost for stocks tomorrow.

The situation with my Oct and Nov iron condors on RUT is largely unchanged. Both are underwater and susceptible to a strong move upward. Both positions are hedged and we'll see what the jobs report does to the markets tomorrow.