Dr. Duke's Blog

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Written by Dr. Duke

Created: 23 August 2010

The markets ran up strongly first thing this morning but were quickly pulled back by the bears and traded along the neutral line most of the day. But the last hour was all selling with the indexes closing at or near their lows for the day. The SPX ran as high as $1081, but closed down $4 at $1067. RUT behaved similarly, running up to $618 before closing at $603, down $8. Trading volume was down across the board, with a 24% decline on the NYSE and a 13% decline on NASDAQ. The S&P 500 stocks traded under three billion shares, well under Friday's volume and below the 50 day moving average.

There was no economic news to drive the market either way today. Some M&A news appeared to boost the market this morning, but it wasn't sufficient to hold the intraday highs. It seems as though the market is afflicted with a general malaise or fear that leads to profit taking whenever stocks trade higher. The low trading volume suggests this sell off is the result of short term trading in and out, rather than a general institutional exit. But the danger of this market is that it won't take much bad news to set off a serious drop.

My Sept iron condor on RUT stands at a P/L of +$740 with a position delta of +$56 and position theta of +$72 on 20 contracts. I plan to initiate my Oct condors later this week.

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Written by Dr. Duke

Created: 20 August 2010

Trading opened down a bit this morning and drifted lower through the morning, but started to recover from noon onward. RUT traded down to $605 for most of the morning and then fell further to $602 before climbing steadily all afternoon to close at $611, unchanged for the day. The SPX traded in similar fashion, but didn't fully recover its losses, closing down $4 at $1072. Trading volume was subdued for an options expiration Friday; it was up 7% on the NYSE but down 9% on NASDAQ. The S&P 500 stocks traded 3.5 billion shares, down from yesterday and below its 50 dma.

RUT's settlement value has not yet been posted, but it seems likely to be around $605, so all of the spreads in my Aug RUT iron condor will expire worthless (550/560 and 590/600 put spreads and 680/690 and 705/715 call spreads). Thus the Aug iron condor gained $923 or 6% on the $15,400 of capital at risk. August was an extremely volatile month; I adjusted the position with long call or put hedges six times. In addition, I rolled spreads up and down four times. These adjustments consumed much of my potential profit. But remember: without those adjustments, we would have been forced to close this position early for either a breakeven or a loss. The adjustments kept us in the position so we could salvage a small profit. This brings my blog trading account up to an overall gain of 18% - not spectatcular, but pretty good given the market volatility we have been enduring. My Sept 530/540 and 740/750 condor stands at a P/L of +$860, delta = +$43 and theta = +$68.

I follow Mark Wolfinger's blog and I recommend it to you. He is a solid No Hype options trader, educator, and author. Today's blog brings up an excellent point about the potential pitfalls of multi-legged options orders - an excellent tip for condor traders. Check it out.

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Written by Dr. Duke

Created: 19 August 2010

The unemployment claims data brought the bears out on a selling spree today. Initial unemployment claims hit a new high of 500k from 488k last week, while continuing claims decreased by 13k to 4.478 million. Then the Philadelphia Fed survey came out at -7.7, down markedly from last month's 5.0. RUT dropped $17 to close at $611 while the SPX dropped $19 to close at $1076. SPX fell through its 50 dma at $1088 like a knife through butter. All of this carnage occurred on increased trading volume. The S&P 500 stocks traded 3.9 billion shares, just above the 50 dma at 3.7 billion shares. Trading on the NYSE increased by 15% and ran up 26% on NASDAQ.

I decided to allow all of the spreads in my AUG iron condor go into expiration; they will all certainly expire worthless with one possible exception for the 590/600 puts, but they have a safety margin of $11. If they expire worthless, this position ends with a $923 gain or 6% on capital at risk. The Sept position stands at a P/L of +$700 with delta = +$46 and theta = +$63. Normally, expiration Friday is a high volume day of trading; it will be interesting to see if volumes are up from today's high levels.

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Written by Dr. Duke

Created: 18 August 2010

The markets opened a bit lower this morning but recovered quickly and closed with modest gains on lower volume. Both the RUT and SPX charts were displaying the classic doji candlestick pattern, indicative of indecision among the traders, i.e., neither the bulls nor the bears were able to take charge and drive the market today. RUT closed up $2 at $628 while the SPX gained $2 to close at $1094. SPX tried unsuccessfully to break through $1100 once again today. If and when SPX closes above $1100, that will be a significant bullish signal. Trading volume was down across the board with a 5% drop on the NYSE and a 4% drop on NASDAQ. The S&P 500 stocks traded 3.2 billion shares, down a bit from yesterday and still well below the 50 dma.

My Aug iron condor on RUT stands at a P/L of +$753 with position delta = +$24 and theta = +$243. All of the spreads in this condor are now greater than two standard deviations OTM so I will probably allow them to expire worthless. But this depends on tomorrow's market movement. Even a small move down will cause me to close the 590/600 put spreads. The Sept position stands at a P/L of +$1,220, delta = +$24, and theta = +$72.

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Written by Dr. Duke

Created: 17 August 2010

The markets opened strong this morning and just kept on climbing through most of the day. The major indexes gave back some of their gains in the late afternoon, but still closed for significant gains. The SPX broke through the 50 dma at $1088 and even tried to break through the next resistance level at $1100 before being turned back and closing at $1093, for a gain of $13. RUT behaved similarly, trading as high as $630 before closing at $626 for a gain of $11. Home Depot posted better than expected earnings and Wal Mart posted in-line earnings; those results may have helped the overall market mood. Economic data was mixed to positive with a 1.7% increase in housing starts for July, but building permits dropped 3.1%. Industrial production increased 1.0% while the PPI increased 0.2%.

Trading volume increased with today's rally. The S&P 500 stocks traded 3.4 billion shares, up from yesterday but still below the 50 dma at 3.8 billion shares. Trading jumped 23% on the NYSE and increased 8% on the NASDAQ. Today's market action was rather bullish, with SPX breaking a significant resistance level on higher volume. If you are a directional trader, I would be cautious about going "all in", but perhaps we will avoid going over the cliff for a "double dip".

Today's gains strengthened my Aug condor position, resulting in a P/L of +$383 with delta = $43 and theta = +$438. The Sept condor sits at a P/L of +$1,260 with delta = +$26 and theta = +$61.

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Written by Dr. Duke

Created: 16 August 2010

Markets opened lower this morning but then traded sideways to slightly upward throughout the day. The SPX dropped as low as $1070 before bouncing back to close unchanged at $1079. RUT dropped to $605 at the open before recovering to close up $6 at $615. Trading volume was flat to down for the day. The S&P 500 stocks traded 2.6 billion shares, down from yesterday and well below the 50 dma. Trading on the NYSE was down 8% but unchanged on NASDAQ. The NY Fed Empire Manufacturing Index posted an increase to 7.1 from last month's 5.1, and the NAHB Housing Market index decreased to 13 for August from the previous month's value of 14. But tomorrow brings the Housing Starts and Building Permits reports, which will be more definitive data for the housing market.

I should not have my Aug condor on RUT still open, but I have been squeezed into this corner, attempting to salvage a gain or at least minimize the loss. The position with 550/560 and 590/600 put spreads and 680/690 and 705/715 call spreads (10 contracts of each) now stands at a P/L of -$727 with a position delta of +$110 and theta = +$397. The theta/delta ratio is good but the large value of delta emphasizes the price risk for this position, with RUT so close to the 590/600 put spreads. My Sept 530/540 and 740/750 iron condor on RUT stands at a P/L of +$660, delta = +$42 and theta = +$62 (20 contracts). So the question remains: have we found the bottom? Today's price action on the SPX seems to suggest that, but the low trading volume doesn't give one any confidence.

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Written by Dr. Duke

Created: 13 August 2010

The University of Michigan Consumer Confidence Survey reported out at 69.6, a small improvement from last month's 67.8. That report served to keep the markets trading near the unchanged line for most of the day. But after about 2 pm ET, the markets slowly declined into the close, but trading volume was greatly reduced. Trading was down 15% on the NYSE and over 27% on NASDAQ. Trading volume in the S&P 500 stocks dropped to 2.7 billion shares, well below the 50 dma. This was the lowest trading volume for the S&P 500 for this year. The SPX traded within $2 of its 50 dma at $1088 before pulling back to close down $4 at $1079. $1088 on SPX will be a key resistance level to watch for a measure of the market. RUT pulled back a bit more to close at $609, a loss of $7 on the day.

My Aug RUT condor closed the day with a P/L of -$1917 with delta = +$133 and theta = +$204. All of these spreads are greater than two standard deviations OTM except the 10 contracts of the 590/600 put spreads. I will be looking for an opportunity to close them on Monday. The Sept condor is in the black with a P/L of +$440, delta = +$50 and theta = +$47.

Have a great weekend.

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Written by Dr. Duke

Created: 12 August 2010

Initial unemployment claims of 484k were reported before the open this morning; while this wasn't much higher than last week's 482k, the market was expecting something more like 465k. This data, together with the fear generated by yesterday's market plunge, was sufficient to create a bout of selling as the market opened. But within a couple of hours, the markets were trading higher than the open; this oscillated back and forth all day, but the major indexes recovered most of their losses before the end of the day. RUT dropped as low as $611 early on, but closed at $617, off $3 for the day. SPX traded similarly, trading as low as $1077 before closing at $1084, down $6. Trading volume dropped off from yesterday with a 9% drop on the NYSE and a 1% increase on NASDAQ. About 3.6 billion shares of the S&P 500 stocks traded, down about 10% from yesterday. So today was still a bearish day on the street and now the SPX is firmly underneath the 200 day moving average which will likely serve as resistance to any bullish rallies. However, today's intraday recovery and the decrease in trading volume are encouraging me that the bottom isn't falling out of the market, but time will tell. The talk of a double dip is raging and may become a self-fulfilling prophecy if a crucial data report or other event occurs in the next few days.

As RUT bounced back this morning, I sold the Aug $630 puts hedging my Aug RUT iron condor for a small profit. This was more aggressive than I would normally play the trade. My Aug position has been hammered by adjustments to both the up side and the bottom side; adjustments usually reduce the profit potential of one's position, but allow the trader to stay in the trade and salvage a large proportion of the position's potential gains. In this case, I have had so many adjustments, I am running out of potential gains to salvage. Thus, I chose to remove this most recent hedge prematurely. If I can nurse this position though the weekend, I should be able to squeeze out a small gain. The Aug position now stands at a P/L of -$1657, delta = +$95 and theta = +$249. The Sept 530/540 and 740/750 RUT iron condor stands at a P/L of +$340, delta = +$36 and theta = +$67. So now we wait and see if we go lower.

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Written by Dr. Duke

Created: 11 August 2010

It appears that many traders began to take the Fed's assessment of the economy much more pessimistically after thinking about it overnight. The market sold off at the open and traded even lower as the day progressed. China's reports of weaker industrial production in July probably didn't help the situation. Talk of a double dip has once again taken the front row in traders' worries. RUT traded down $26 to close at $620 while the SPX closed down $32 at $1089, the 50 day moving average (dma). This move occurred on higher volume, with the S&P 500 stocks trading 4 billion shares, right at the 50 dma. Trading volume on the NYSE was up 15% and trading on the NASDAQ increased 11%.

In volatile markets like we have been experiencing, one's condor position can change overnight; yesterday, the Aug position appeared to be well positioned; today I bought one Aug $630 put for $17.45 to hedge this downside move; this brings the position to a P/L of -$1712, delta = +$31 and theta = +112. My Sept condor stands at P/L = +$980 with delta = +$58 and theta = +$19. The Aug position has now required six hedge adjustments plus four rolls of spreads up and down - what a volatile market! More importantly, we are still "in the game" with a shot at breaking even or perhaps even a small profit. Which way will the roller coaster run tomorrow?

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Written by Dr. Duke

Created: 10 August 2010

The drop of 0.9% in nonfarm productivity levels surprised the market this morning and caused a sell-off on higher volume. RUT dropped back to its 200 dma before bouncing to close at $646, down $13 on the day. SPX fell through its 200 dma but recovered to close at $1121, down $7 on the day. The FOMC announcement appeared to buoy the market a bit, but it was short lived. As expected, interest rates were unchanged but some of the Fed's language concerning the economy was sobering, confirming signs of very slow economic recovery and not giving a lot of hope for anything to change soon. As has been typical lately, the trading volume bounced up on the sell-off, increasing to 3.5 billion shares of the S&P 500 stocks, up 29% on the NYSE, and up 26% on NASDAQ.

My Aug iron condor on RUT was helped by this sell-off, now standing at a delta of -$27 and theta = +$265, while the Sept condor has a delta of +$14 and theta = +$55. RUT appears to be building strong support at its 200 dma at $642 while the SPX appears to have strong support in the range of $1100 to $1115. This pattern together with the weak volume on advances, suggests the risk to our condors is to the upside, not the downside. But, the key is to play what the market gives us, not what we predict. For now, both of my condors are well positioned.