Dr. Duke's Blog

Details

Written by Dr. Duke

Created: 28 April 2010

The markets opened up positively this morning but dropped after being hit with the news that Standard and Poors downgraded Spain's debt. The markets then largely just chopped sideways, but strengthened a bit just before and after the FOMC announcement that interest rates would remain unchanged. Then the sideways march resumed until the last hour when the markets sold off. Trading volume was generally down today with a 14% drop on the NYSE and a 3% drop on NASDAQ. Trading of the S&P 500 was down a bit from yesterday's huge volume, but still above average at about 5 billion shares. Late in the day, RUT gave back all of the day's gains to close at $722, up $1. SPX was able to recover from the late sell off a little better and closed with an $8 gain at $1191. The recent attention given to the debt problems of some of the European countries has the bulls reconsidering their posture. But most of the economic news and earnings announcements in the US markets have been positive - thus, the choppy sideways market today.

My May iron condor on RUT remains unchanged with a P/L of -$1,420, delta = -$43, and theta = +$150 - a very healthy theta/delta ratio with 22 days to go.

Details

Written by Dr. Duke

Created: 27 April 2010

Traders started the day on a sour note as Standard and Poor's downgraded both Greece's and Portugal's debt. This served to weaken the Euro relative to the dollar, resulting in one of the strongest days recently for the dollar. A stronger dollar normally hurts the market because it makes it more unfavorable for U.S. companies to export their goods. However, a stronger dollar also makes it easier for the U.S. to finance its debt, but that's another story. So the markets were down across the board and with higher volume as well. The sovereign debt news overshadowed two positive news items: the Case-Schiller housing price index for February increased over January and consumer confidence numbers for April also increased. Trading on the NYSE was up 39% and up 15% on NASDAQ. Trading volume for the S&P 500 jumped up to six billion shares; this makes the tenth day in succession that the S&P 500 trading volume has been above the 50 day moving average. Now the question on everyone's mind is whether this is just the beginning of a correction, or a knee jerk reaction to the S&P downgrade news. The VIX jumped to 23% on today's market action. RUT closed at $721, dropping almost $18 and the SPX lost $28 to close at $1184. SPX has a strong support level at $1180-$1182 and today's intraday low was $1182. I'll be watching to see if that support level is broken tomorrow. That would be one clue that the trend may have changed.

I removed the call hedges on my May RUT iron condor today and it now stands at a P/L of -$1660, delta = -$48 and theta = +$143. The theta/delta ratio is strong at this point, but further movement downward would actually be helpful to this position. Tomorrow afternoon we hear from the FOMC. Everyone presumes the easy credit will continue; if that presumption proves to be incorrect, we may see additional moves downward.

Details

Written by Dr. Duke

Created: 26 April 2010

The markets opened weak and choppy this morning, but then began a slow ascent; it looked like business as usual. But then the sellers came into the market this afternoon and drove the S&P 500 and the Russell 2000 indexes to losses on the day. The Dow closed essentially even, up less than a dollar. There wasn't any significant news; the most recent earnings announcements have continued to be rather positive.  The Case-Schiller housing index and consumer confidence numbers are due out tomorrow. FOMC announces interest rate changes, if any, on Wednesday afternoon. If the Fed ticks the interest rates up even a little, that might trigger a bout of profit taking after this strong run. Trading volume was pretty flat today, suggesting we shouldn't read too much into today's declines. Trading volume on the NYSE was up less than 1% while the NASDAQ was down 2%. Trading on the S&P 500 rose a bit from Friday, remaining around 4.5 billion shares and above its 50 day moving average. The VIX popped up 5% to 17.5%.

My May condor hasn't changed much with a P/L of -$1760, delta = -$22 and theta = +$101. Barring any surprises tomorrow, the market may tread water until the FOMC announcement Wednesday.

Details

Written by Dr. Duke

Created: 23 April 2010

The market traded down at the open this morning, then chopped sideways before beginning a slow climb upward to close at new 52 week highs. The sovereign debt problems in Europe appeared to color the opening mood, but new home sales posted a 27% rise in March and that report, along with continued positive earnings announcements, appeared to fuel the gains. RUT ran up almost $8 to close at $742 while the SPX closed at $1217, a gain of nearly $9. Trading volume was down 8% today on the NYSE and down 13% on NASDAQ. Trading of the S&P 500 dropped back to just above its 50 day moving average. The earnings announcements continue in earnest next week; the Case-Schiller housing price index will be reported Monday and the FOMC will announce their interest rate decision Tuesday. Those are the next significant pieces of economic news that may move this market.

My RUT May iron condor started with 20 contracts at 590/600 and 750/760; about a week ago, I rolled the 590/600 puts to 650/660 and half of my 750/760 calls to 770/780. Today I rolled the balance of the 750/760 calls up to 770/780. The June 750 call hedges remain in place. The overall position now stands at a P/L of -$1600, delta = -$27 and theta = +$80. The June hedges are up over $1600 and rolling the puts upward added $1300 in gains. That is why this position is only $1600 underwater at this point with the RUT advance of the past several weeks.

Several people have asked me recently if trading the iron condor is no longer appropriate for this market. It is certainly true that the RUT index is too volatile for condor traders at the moment. But that conclusion is based on the rear view mirror. If I were in the predictions business, I might choose a different index to trade. But the essence of my trading philosophy is to react to what the market does today, not to predict the market's direction or speed of movement. Any rules that require me to predict which index is best this month, or predict whether I should sit out this month, are simply inconsistent with my trading strategy. This strategy has worked well for me through the good times and the bad times in the past. Success is not measured by never taking a loss. Success is achieving net positive gains over the long term.

Details

Written by Dr. Duke

Created: 22 April 2010

The markets gapped down at the open today and then traded down even further before strengthening and trading steadily up the rest of the day. Moody's analysts downgraded Greece's debt after a larger than expected fiscal deficit was reported. That news appeared to set the gloomy start to today's trading. Earnings reports were generally positive and economic news was modestly positive. Initial unemployment claims dropped to 456k from 480k while continuing unemployment claims dropped by 40k to 4.646 million. These certainly aren't large changes, but they are in the right direction. The Producer Price Index increased 0.7%, a little more than expected and this prompted talk of looming inflation. Existing home sales increased to 5.35 million in March (up from 5.01 million), and the FHFA home price index dropped 0.2%, an improvement over last month's 0.8% drop.

SPX gapped lower at the open and traded as low as $1190 before the bulls came to the table and traded it back to close at $1209, an increase of a little less than $3. RUT traded in a similar fashion, trading as low as $716 before climbing to a close of $734, up $8 on the day. Trading volume was modestly up on all of the exchanges: up 7% on NYSE and 6% on NASDAQ. The S&P 500 traded over 5 billion shares, up from yesterday and well above the 50 day moving average. The underlying bullish strength of this market is demonstrated almost every day as negative news takes the markets lower, but the bulls always see the intraday lows as a motive to buy. It would be unwise to bet against this market.

And in keeping with that sentiment, I have continued to adjust and hedge my May iron condor on RUT to avoid the oncoming train. Today's upward move on RUT pushed the greeks of our position into a riskier neighborhood, with the current loss increased to -$1020, delta = -$44 and theta = +$75. Our hedges are containing the losses of the position, but we are being forced to roll our remaining call spreads upward. The bulls are maintaining the charge for now. I am not going to try to predict when this trend will slow or reverse.

Details

Written by Dr. Duke

Created: 21 April 2010

Trading was choppy and mostly sideways in the markets today. But the Russell 2000 Index pulled away in the last two hours of trading to post a modest gain for the day, leaving the other indexes mostly flat. Trading volume was up 7% on the NYSE, but jumped 29% on NASDAQ due to AAPL's strong earnings announcement plus Visa's acquisition of Cybersource. About five billion shares of the S&P 500 traded today, up from yesterday and still above the 50 day moving average. The SPX dropped below $1200 for a brief time today but rebounded to erase the earlier losses and close at $1206, up less than a dollar for the day. RUT touched down as low as $720 but rebounded to close up almost $5 at $726.

My May RUT condor stands at a P/L of -$720 with a position delta of -$7 and theta = +$76. My call spreads are split between 750/760 and 770/780. While the 750/760 spreads are under considerable pressure, the other call spreads plus a couple of June 750 calls are holding this position at a reasonable level of risk. The bullish strength of this market continues unabated (today's evidence was SPX being bought up shortly after touching 1200), but the slope of the curve is diminishing. I am beginning to be a little concerned about the bullish headlines and magazine covers. When everyone is convinced the market is going up, is often just before the correction. Don't forget the free webinar tomorrow evening.

Details

Written by Dr. Duke

Created: 20 April 2010

The bulls continue to drive this market higher. Today's move upward was unusual in that it was in the face of a modestly stronger dollar. The VIX dropped almost 10% to close at 15.7%. Trading volume dropped about 10% on the NYSE and was flat on NASDAQ. Trading volume for the S&P 500 dropped again today to about 4.5 billion shares, but that is still above the 50 day moving average. RUT closed at $722, a gain of a little over $10; SPX gained almost $10 to close at $1207. Today's moves put RUT and SPX back in the upper range of their Bollinger Bands; they have been consistently above the midpoint of the band since March 1 - quite a run.

My May condor position required some further tweaking today to keep it in a good position: P/L = -$950, delta = +$13, and theta = +$84. That strong ratio of theta to delta is important. You can think of theta as your profit engine, working to generate cash each day. But the delta value represents our price risk when the index moves against us. Thus, we want a small delta and large theta, ideally in a ratio of two to one or larger.

Details

Written by Dr. Duke

Created: 19 April 2010

Conflicting forces resulted in a choppy sideways market today. Weakness in the Euro due to Greece, et al. pushed the dollar upward and that pushed the stock markets downward. But financial issues were being bought early today because many traders felt they were oversold yesterday in the wake of the Goldman news. Then it was reported that the SEC voted 3 to 2 to proceed with the case against Goldman (GS); that encouraged buyers of GS and the financials in general. The mixed vote was considered indicative of a weak case against GS. I believe it also lends evidence to the view that the GS case may be politically motivated to support financial regulatory reform in the congress. RUT traded as low as $702 before closing at $711, down $3. The SPX traded similarly until about 2 pm ET, when some strong buying erased earlier losses and pushed SPX up to a net gain of $5 to close at $1198.

My May RUT condor stands reasonably well balanced at this point (surprisingly after all of the swings back and forth) with 10 contracts of calls at 750/760, 10 contracts of calls at 770/780 and 20 contracts of puts at 650/660. The P/L is -$1,260, with position delta of -$15 and theta = +$112. Tomorrow's markets will be driven by IBM's earnings report this evening and reports from GS, KO, and JNJ in the morning. Expectations are generally positive so even a minor disappointment could drive the market down. But today's strong finish supports the bullish bias that appears to be prevalent.

Details

Written by Dr. Duke

Created: 16 April 2010

When Thomas Paine said, "These are the times that try men's souls", he wasn't thinking about markets, but that is certainly an appropriate quote for delta neutral traders over the past 18 months. Only two days ago, the markets took off with a roar and ran over everything in their way. Today they gave back much of those gains. Google's earnings announcement unnerved some investors with concern over future investments and Eric Schmidt's absence on the conference call. Based on that alone, I expected some softness this morning. But then the SEC charged Goldman Sachs with fraud and the market collapsed; everyone was running to lock in the profits from this incredible run-up of the past 45 days. RUT dropped nearly $10 to close at $715 while the SPX closed at $1192, down nearly $20. Trading volume is always higher than average on expiration Friday but today's trading was off the charts. The S&P 500 traded over seven billion shares today!

Ironically, I adjusted my May condor on RUT yesterday by rolling half of my 750/760 calls to 770/780 and closing all of my 590/600 puts and rolling them to 650/660. I left my June $750 calls in place as a hedge against a continued move upward. Imagine my surprise today. But it is better to have adjusted early than too late. The position greeks are solid with delta = +$13 and theta = +$82. The risk/reward chart suggests the P/L for this position will be essentially unchanged up to around $730 on RUT, so it is well hedged for a continued move upward. But do I need a hedge for the upside? The RUT hit a low of $710 today and then traders came to the table and bid it back up, so I think the basic bullish case for the market is intact. Bulls are still buying the pullbacks.

Details

Written by Dr. Duke

Created: 15 April 2010

The markets slowed to catch their breath after yesterday's huge run; trading was choppy but mostly sideways. Trading volume was flat to increased with volume on the NYSE up 3% but down 9% on NASDAQ. But the S&P 500 traded at over 5 billion shares, even more than yesterday's big increase. Greece's financial difficulties are still on traders' minds; today's economic news was mixed with the Empire State Manufacturing survey hitting a five month high but industrial production only increased 0.1%, less than expected. Initial unemployment claims increased to 484k from 460k and continuing claims increased by 30k to 4.6 million. It seems as though most economic measures are flattening or improving, but jobs aren't being created yet. A combination of some disappointing economic news together with consolidation from yesterday's upward run led to a mostly sideways day in the markets. RUT closed up $2 at $724 and the SPX closed nearly unchanged at $1212. The bullish case is still very much alive; all dips are being bought.

I made further adjustments and repositioned my May RUT iron condor to shift its greeks into better position: now delta stands at -$1 and theta = +$81.  The underlying strength of this market is remarkable; it is just bulldozing right through all of the overbought technical indicators. So I decided to aggressively reposition my May condor to a delta neutral stance with 35 days to go.