Dr. Duke's Blog

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Written by Dr. Duke

Created: 30 March 2010

The markets opened up positively this morning on the basis of reasonably good news. The consumer confidence index reported an increase to 52.5 for March, up from 46.4 in February. And the Case Schilling Housing Index reported a 0.7% drop in existing home sales prices for January (December was down over 3%); this was the smallest drop in this index for three years. But then the markets succumbed to selling pressure for most of the day. But the last hour and a half brought the bulls back in to recoup most of the losses. RUT closed up less than $2 at $684 while the SPX closed unchanged at $1173. Trading volume was mixed with the NYSE being down 6% and NASDAQ up 10%. The S&P 500 traded at successively lower volume for the third consecutive trading session. The SPX  price action for today was the classic doji candlestick - not a definitive trend reversal signal by itself, but it does reinforce the other action we have been seeing - basically a balance of the tug of war between the bulls and the bears. Friday's unemployment report will probably be the catalyst to push the market one way or the other. Since the market will be closed Friday, the trading tomorrow and Thursday will reflect traders' predictions or may just reflect defensive precaution, i.e., take your profits and wait and see what Monday brings from a safe cash position.

My April iron condor continues to improve its position as time decay kicks in; it is now at a P/L of -$1,525 with delta = -$13 and theta = +$160. The May position has now moved into the black with a strong theta/delta ratio over 2:1.

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Written by Dr. Duke

Created: 29 March 2010

The markets traded down most of the day, but started a strong rebound at 2:30 ET and managed a small gain, but on lower trading volume. The S&P 500 dropped back below its 50 day moving average; volume on the NYSE fell 6% and NASDAQ trading volume fell 17%. The dollar was down today but strengthened a bit as the day wore on. Personal income data for February was flat while personal expenditure rose only 0.3%; core personal expenditures were unchanged (core expenditures exclude food and energy). RUT closed at $682, up a little over $3 and near its intraday high of $683. The pattern for SPX was similar with a rise of $7 to close at $1173. $1175 appears to be establishing itself as resistance for the SPX. Several recent trading days have displayed intraday highs that could not be held. The big question is whether this is just classic consolidation behavior after a strong gain or the setup for a correction. Many traders are already discussing their concerns that the market will be closed Friday when the unemployment numbers are reported. We may see some money taken off the table this week in anticipation of that report. Although the ADP numbers on Wednesday and the new and continuing unemployment claims numbers on Thursday may influence how the big players position themselves.

My April condor is still underwater but the greeks are excellent with a delta of +$21 and a theta of +$155. The May position is still very young but has a strong theta/delta ratio over 4:1.

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Written by Dr. Duke

Created: 26 March 2010

The Commerce Department reported this morning that 4th quarter GDP grew 5.6% and the University of Michigan's Consumer Sentiment survey for March came in at 73.6, up from 72.5. This seemed to fuel some modest gains for the markets this morning, but then the bottom fell out around noon and by the close, most markets were nearly flat. RUT closed at $679, essentially unchanged while the SPX gained less than a dollar to close at $1167. Both the RUT and SPX charts appear to be establishing a sideways trading range. For the past several sessions, there appears to be some profit taking whenever the market gains much, but then buyers come in whenever the market dips. The case for the bullish trend appears to still be in place, but the recent extreme gains have to be digested.

My April condor is treading water, trying to salvage a small gain or at least a minimal loss. It is now about $2,700 underwater, but the Greeks are excellent with delta = +$10 and theta = +154. We still have a hope of getting out of this position with a small gain, but it will be touch and go. I decided to go back in the water today and established my May condor position at $590/$600 and $750/$760 for a credit of $3,100 (20 contracts). At the close, the position delta stood at -$15 and theta = +72.

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Written by Dr. Duke

Created: 25 March 2010

The Labor Department started the markets off on a positive footing this morning by reporting initial unemployment claims fell by 14k to 442k this past week and continuing claims fell from 4.702 million to 4.648 million. Much of the news early in the day was optimistic about plans for bailing out Greece's fiscal mess, but as the day wore on, skepticism about the details of the plans grew and this took the euro down and strengthened the dollar, reversing the market's earlier gains. Trading volume was up about 11-12% on the NYSE and NASDAQ. RUT closed down almost $5 at $679 after running as high as $693. SPX followed a similar pattern, closing at $1166, down $2.

This type of wide market swing makes life difficult (and costly) for the delta neutral trader. I was forced to enter an adjustment for my April iron condor position this morning, but then took it off before the market closed this afternoon. That cost me about $300 on a 20 contract position. But that is the cost of insurance. If you are looking for the silver lining in this market action, it certainly isn't boring!

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Written by Dr. Duke

Created: 24 March 2010

The market's mood was cautious before the opening today due to concerns about the debt crisis in the Euro zone. The dollar index increased 1.3% today, the largest increase in a single day since December.  The durable goods orders report this morning indicated 0.5% growth; 0.6% was expected. The better news was a upward revision of January's number to 3.9% from 3%. New home sales decreased in February by 2.2%; analysts were expecting a 1.9% increase. The economic data probably weighed somewhat on the market, but the strong increase in the dollar's strength was hard to ignore. Even so, the markets held up pretty well, once again showing the underlying strength of this market. RUT traded down almost $7 and closed at $684. The SPX lost a little more than $6 to close at $1168. Trading volume was up less than 5% on the NYSE and essentially flat on the NASDAQ; the S&P 500 continued to trade below its 50 day moving average. Today's price action on both the RUT and SPX charts displayed the classic "inside day" on the bar charts or the Harami for the candlestick devotees. These patterns are often seen at points of a trend slowing and consolidating, or perhaps even a market reversal. Time will tell.

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Written by Dr. Duke

Created: 23 March 2010

Today's trading repeated a common pattern of late: every dip in the market appears to be seen as a buying opportunity for the bulls. RUT and SPX both set new 52 week highs today. RUT traded down a little this morning and then slowly rose in the afternoon and spurted to the finish in the last half hour of trading. RUT closed up over $7 at $690. SPX traded in a similar pattern and closed at $1174, up over $8. The late afternoon surge appeared to be triggered by a weakening in the dollar as the euro rebounded. The weak trade in the morning may have reflected the drop in existing home sales from January to February and a drop in the FHFA Home Price Index of 0.6% - not great news of recovery, but no severe contraction either. But even in the face of that data, the market didn't trade down much; RUT dropped less than $2 after the announcement. All in all, the market appears to be firmly on a bullish trend. Trading volume on the NYSE and NASDAQ were flat while the S&P 500 continued to trade below its 50 day moving average.

At this rate, I may have to adjust my April condor again, or just close the call spread side of the position. The $720 calls are now at a delta of 13. I'm certainly in no hurry to establish my May condor in the midst of this strong trend.

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Written by Dr. Duke

Created: 22 March 2010

With the recent strong move upward in the markets, many analysts have been looking for a pull back, so Friday's market action was not a surprise and the fact that the S&P futures were in negative territory before the open this morning appeared consistent with a follow through on Friday's action. Many analysts also thought passage of the health care bill would take the markets lower. The markets indeed did open lower this morning but almost immediately turned upward and steadily increased in choppy trade all day. This is very bullish market action. As soon as the bears started the sell off, the bulls saw it as a buying opportunity and jumped in. So the bullish case for the markets is still dominating traders' thinking. Trading volume was down as compared to the high volumes from the quadruple witching Friday. Trading volume for the S&P 500 was back below the 50 day moving average, close to where it was on Thursday. It seems odd to me that many of these large upward market moves are being accomplished with low trading volume. RUT traded down to what is shaping up as a solid support level at $668 - $670 before trading up to close at $683, a rise of $9. SPX traded down to $1153, just above support at $1150 and then traded up to close at $1166, a rise of $6. The VIX closed just under 17%. My April condor continues to present pretty good Greeks at a position delta of -$68 with +$115 of theta. I will probably establish the May position late this week or early next week.

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Written by Dr. Duke

Created: 19 March 2010

The markets pulled back today and the talking heads attributed it to the Euro's weakness due to concerns about Greece causing a strengthening in the dollar and therefore weakening the stock markets. However, as most of us have observed over the past several months, the inverse relationship between the dollar and the markets is anything but consistent. Those of you in our webinar last evening will recall our discussion of the declining volume in the S&P 500 over the past five sessions as new highs were being made - clearly a bearish sign. But I don't think this amounts to anything more than some profit taking after a huge bull run. Trading volume was markedly up today, probably due to quadruple witching expiration - contracts for index options, stock options, single stock futures, and index futures all expired today. RUT closed at $674, down a little less than $8 and the SPX gave up almost $6 to close at $1160.

My April iron condor was assisted by this move down today, the delta for this position now stands at -$19, pretty close to delta neutral, while theta is +$85. Someone in the Trading Group webinar asked why we didn't roll up the put spreads that are over two standard deviations OTM to move this position into profitable territory. My answer was that I was concerned about a pullback after such a huge run upward, especially in light of the recent declining trading volumes. We will be watching for signs of stabilization before rolling up those put spreads.

I was also asked last evening if the trouble with my March and April iron condor positions suggests that this strategy "doesn't work anymore". Trading the iron condor, or any delta neutral strategy, is a probabilistic strategy. Occasional losses are expected; the key success factor is a system of risk management that minimizes the losses so that the more frequently occurring gains are not wiped out. My loss of $2,850 in March is approximately what I gained in February ($2,794); my blog trading account is still up 36%. This trading strategy is like being in the insurance business; we will have claims (losses). As long as the claims don't wipe out the premiums collected on all of those policies, our insurance company will remain profitable. As long as our system of risk management minimizes our losses in the "bad" months when the market takes off in one direction or the other, our account will continue to have net gains.

However, if you started your insurance company a month or two before Hurricane Katrina hit, you might be discouraged and wonder if you were in the right business. Those of you who just decided to try trading the iron condor in March are in the same predicament. Hang in there. Use this time to reassess the risk management of your trading system. Keep fine tuning your system; continue to learn and improve. It is a feasible business.

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Written by Dr. Duke

Created: 18 March 2010

Trading in the markets was very choppy today, but with no net change by the end of the day. Trading volume was down 6-10% on the major exchanges. The CPI came in unchanged this morning, good news for those concerned about the Fed's easy money policy stimulating a round of inflation. One could argue that minimal inflation coupled with low interest rates should be a strong stimulus for business and consequently, the markets. From that perspective, this strong market move upward isn't surprising, but the record high unemployment numbers and Fed red ink gives one pause. The initial jobless claims number came down by 1% to 457k while the number of continuing claims rose a few thousand to 4.579 million. But this number does not include workers who have exhausted the "normal" unemployment benefits and moved into the extended unemployment benefits category. The VIX closed at 16.6%, its lowest level since May of 2008. RUT closed down less than $2 at $682 while the SPX closed unchanged at $1166.

Today's pause in the market's ascent was refreshing for my April iron condor position that now stands at a P/L of -$2,685, delta = -$75 and theta = +$120. The $720 calls have a delta of 13, so this position is relatively unstressed at this point; a couple of weeks of consolidation would be helpful after the damage inflicted by this recent rocket launch of the markets.

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Written by Dr. Duke

Created: 17 March 2010

The markets opened strong and kept trading up almost all day; some profit taking ensued around 2:30 ET, but the major indexes all closed with solid gains. Trading volume remains average to low; it was up 1% on the NYSE and 6% on NASDAQ; trading volume for the S&P 500 remains at its 50 day moving average. The Producer Price Index dropped 0.6%; that together with further analysis of the FOMC announcement appeared to encourage traders. Lower PPI encourages the inflation hawks and the FOMC language generally put a positive spin on the economic recovery. RUT closed up a little over $4 at $684 while the SPX closed at $1166, up almost $7. Both the SPX and RUT have been tracking along the upper edge of their Bollinger Bands since late February. Whenever I see this price behavior, I keep thinking it has to pull back, but you can incur a lot of damage by trading that belief. Tomorrow brings the CPI and jobless claims reports, but it seems unlikely those reports will derail this train.

I closed the last call positions for my Mar condor today; I will allow the 620/630 puts to expire worthless. After buying 3 hedge positions of long options and rolling spreads up and down nine times, this position ended up with a loss of $2,850 or 19% on twenty contracts. I was too aggressive in removing one of the call hedges at one point and that cost me dearly. The lesson here is that taking a small loss on the long hedge options is much preferable to a larger loss on the spread positions. But, in any case, it is a manageable loss. I was forced to roll the 700/710 calls of my April condor up to 720/730. This strengthened the position somewhat to a positive theta of $125 and a delta of -$87. March and April are turning out to be very tough months for delta neutral traders.