Dr. Duke's Blog

Details

Written by Dr. Duke

Created: 01 February 2010

Most of you realize I am very skeptical of the utility of CNBC. Today was a good example. Everybody was upbeat and looking forward to wonderful things ahead. Economic recovery, strong earnings, all is bliss. Last week you would have been tempted to slice your wrists after watching for a few minutes. The point to remember is this: one of the key success factors in trading is emotional control. That is why trading systems and their rules are so helpful - they keep our emotions in check. If you are a delta neutral income trader then this message is doubly important; I really don't care where the talking heads think the market is heading; I am just playing what the market does today.

The ISM manufacturing data this morning was a large boost for the markets. That index reported its highest number (58.4) since 2004. That manufacturing data together with a weaker dollar appeared to encourage traders. Another positive sign was strong buying right into the close of trading today. The RUT closed at $609, up over $7. The SPX ran up over $15 to $1089.

My Feb RUT iron condor now stands at a P/L of +$2,000, delta = -$33 and theta = +$232. This condor is now almost perfectly positioned at about plus or minus one standard deviation each way and theta is building nicely. On the other hand, my adjustments have narrowed the field here so it is likely we will be closing this condor early unless the market just trades sideways from here.

My March RUT iron condor has also moved into the black with an overall P/L of +$960, delta = +$27, and theta = +$72. In spite of my warnings above, we are all tempted to be looking forward - just don't act on it. In that spirit, is the correction over?

Details

Written by Dr. Duke

Created: 29 January 2010

The markets traded up from the open this morning, but after about two hours, they turned downward and didn't look back. The SPX closed at $1074 after dropping almost $11 today. The S&P 500 is now down almost 7% since its 52 week high earlier this month. RUT closed at $602, a drop of almost $6; RUT is down a little over 7% since its 52 week high a couple of weeks ago. The major indexes had their worst monthly decline since February of 2009. All of this market carnage occurred in the face of a better than expected fourth quarter GDP report of an annualized rate of 5.7% (the street expected 4.7%). Some of the CNBC talking heads cite worries about European financial problems; the dollar traded higher, at least in part due to relative strength to the Euro.

My Feb RUT iron condor now stands almost perfectly centered at plus or minus one standard deviation with a P/L of +$1,660, delta = +$21 and theta = +$162. You can see the theta starting to build now that we are down to 20 days to expiration. The drop in RUT late today pushed my Mar RUT iron condor to the edge of adjustment; if RUT doesn't rally Monday, I will be adjusting this position. It now stands at near breakeven, delta = +$31 and theta = +$72. There is a good lesson here. We have had a significant correction this month, but neither of our condors are bleeding red ink. That is because we didn't just sit and hope it would turn around. The iron condor will eat your lunch if you don't actively manage the position.

Details

Written by Dr. Duke

Created: 28 January 2010

Today's markets opened weak and traded down pretty severely until late morning; the rest of the day was choppy but generally up. A negative note was a sell-off in the last half hour. This often shows pessimism on the part of traders not wanting to hold much of a position overnight. As always in this situation, everyone has their explanation; often it is simply rationalization after the fact - it makes us humans think we are in control. Anyway, the increase in unemployment claims this morning certainly didn't help the dour mood; and the market is still concerned about Bernanke's reappointment. That is simply a case of "the devil you know". The street hates uncertainty. The S&P 500 dropped almost $13 to close at $1085. That is significant because that was the support level held during much of November and December. RUT lost over $10 to close at $608. Again, during most of November and December, RUT hovered in the $605 - $610 range.

My positions were sitting on the edge going into today's market so I wasted no time making some adjustments this morning. That was fortunate because it just got uglier. I closed the 20 contracts of the Feb 690/700 calls for $0.10 and opened 20 contracts of the 640/650 calls for $1.21. That balanced out the Feb iron condor nicely; now both spreads are approximately one standard deviation OTM with a net gain of +$1,160, delta =-$82 and theta = +$198. I modeled buying one or two Mar $570 puts but it killed my theta too much; rolling down the calls worked much better. I have boosted my theta sufficiently that I can buy a long hedge put later if necessary.

I made a similar adjustment to my March RUT iron condor; I closed ten contracts of the 690/700 calls for $0.38 and rolled down to 670/680 for $0.80. That brought the position to a net gain of $540, delta = +$10 and theta = +$72. So now we go back to the game of guessing how much of a correction is enough. But remember; that's a side game for amusement. Playing delta neutral positions relieves you from predicting - you just play what the market gives you.

Details

Written by Dr. Duke

Created: 27 January 2010

The first FOMC statement of the year caused a lot of choppy trading this afternoon, but the trading turned consistently bullish for the last hour, enabling some modest gains on the major indexes. The mixed reaction to the FOMC statement probably had to do with the fact that while interest rates will remain low, one fed governor voted against that policy. RUT closed at $618, up over $6 while the SPX gained a little over $5 to close at $1098. The $1100 resistance level that proved to be a significant barrier through most of November and December is now holding firm once again. RUT appears to have bounced off the support level at $610 set back in mid December before the markets broke out to new highs. The next strong resistance level for RUT is around $625.

Today's modest move upward was helpful for my iron condors. The Feb position now stands at a P/L of +$2,040, delta = +$46 and theta = +$86. The Mar condor has broken into the black with a gain of $610, delta = -$5 and theta = +$75.

Details

Written by Dr. Duke

Created: 26 January 2010

A few weeks ago, it was common to see the market trade downward, but see the buyers come in late in the day and take control to push it back up. Now we are seeing the sellers seizing every opportunity to take their profits. Today's markets opened lower but were buoyed by a positive consumer confidence report for January this morning. This led a surge in the stock markets and boosted the S&P 500 to above its strong resistance level at $1100. But the selling began around 2 pm and continued throughout the remainder of the trading day. The SPX lost almost $5 to close at $1092 while the RUT closed at $612, down $6. Good earnings reports have generally been met with profit taking with the exception of AAPL, which is trading strongly after its excellent earnings report last evening.

My Feb RUT iron condor stands at a P/L of +$1,500, delta = +$64 and theta = +$77. The delta of the short 570 puts is 16. Both this delta and the theta/delta ratio near 1:1 tell us we are near a possible adjustment if the RUT drops much more.

My Mar RUT iron condor is roughly at breakeven with a P/L of +$100, delta = +$11 and theta = +$70. It is interesting to note that the delta of the short 570 puts is 24. But I have not required an adjustment to this position because adding the 670/680 call spreads balanced out the overall position delta. So our downside price risk is minimal. The risk/reward chart shows that this position will have a maximum loss of the order of $1000 or less down to RUT = $595 or so. When you have the standard iron condor configuration, watching the short option delta is a good adjustment trigger, but when you have mixed some of the spread positions, you must primarily watch your overall position delta and the theta/delta ratio.

Details

Written by Dr. Duke

Created: 25 January 2010

The markets opened up strong this morning but the existing home sales report at 10 am this morning sent the markets downward (Dec sales down 17%). The markets recovered from that through the balance of the day, but selling during the last hour of trading erased many of the gains. The SPX rose $5 to close at $1097 while the RUT was nearly unchanged at $518. The VIX pulled back to 25%. Trading volume was generally below recent averages, so the market's participants do not appear to be fully convicted in either direction.

Friday left my condors in need of some adjustment and initially this morning it appeared that might not be necessary. But later in the morning, I decided to make some changes. I left the Feb RUT iron condors as they were because the overall delta of the position was not really out too far. That position now stands at a net profit of $1,700, delta = +$46, and theta = +$73. The delta of the Feb $570 puts is now just under 16 - not too bad, but still close to my adjustment trigger. I considered several different adjustments to the Mar RUT iron condor but settled on adding ten more contracts of the 560/570 puts at $1.75 and ten more call spreads at 670/680 for $1.45. Thus, my Mar condor now consists of ten 690/700 calls, and ten 670/680 calls, and twenty 560/570 put spreads with a total P/L of -$20, delta = -$14 and theta = +$57. The balance of the week is loaded with economic reports and earnings announcements, so it is unlikely this market is just going to trade sideways. If you are unable to watch the market throughout the day, you might consider moving up your stop losses to be even more conservative given the recent volatility.

Details

Written by Dr. Duke

Created: 23 January 2010

Concerns about the administration's attack on the banks led financial stocks downward yesterday. News that Bernanke's reappointment may be in trouble sent jitters through Wall Street and increased the selling pressure. In this environment, good earnings reports are leading to selling pressure; Google, AMD, Capital One, and American Express all took it on the chin after beating estimates. The VIX spiked to 27% after being at new lows around 17% just a few days ago. Investors Business Daily (IBD) changed their market posture to "Market in Correction" (if you aren't familiar with IBD either via the newspaper or their web site, you should check it out - excellent investing resource). RUT closed down $11 to $617, breaking the strong support level at $625 set by the double top back in September and October. The next support level isn't as well defined in the $590 - $600 range. SPX closed down almost $25 at $1092, just below its long time support level at $1100.


These big downward moves have not tripped my stop losses, but they have pushed both of my condors to an adjustment point. I was in Chicago all day Friday at a trading conference sponsored by Know Your Options. This is a good example of why you have contingent orders entered with your broker to protect your positions. So I will be adjusting both of these positions Monday unless the market strengthens. The Feb iron condor stands at a profit of $1,140 with a position delta of +$43, and theta = +$71. The Mar iron condor stands at a P/L of -$170, delta = +$5 and theta = +$29.

Details

Written by Dr. Duke

Created: 21 January 2010

Obama's next move to shore up his political position after the embarrassment in MA was to declare war on the banks; after all, it worked for Jesse James, didn't it? No one likes banks. The news sent the financial stocks and the rest of the market plunging this morning, and unlike other recent sell-offs, the bulls didn't come to the rescue late in the day. News of rising new unemployment claims fed concerns that the economic recovery is far from a certain reality. RUT broke its support level at $633 and closed at $628, just above the next support level of $625, established back in September and October (the double top). SPX traded similarly and closed down nearly $22 at $1116.

My Feb 560/570 and 690/700 iron condor now stands almost perfectly delta neutral with a P/L of +$1,800, delta = +$9 and theta = +$84. I established the beginnings of my March iron condor today with 10 contracts of the 560/570 put spreads for $1.27 and 10 contracts of the 690/700 call spreads at $1.11. Over the next several days I will look for an opportunity to add to the March position. More and more of the talking heads on CNBC are talking about a possible correction, but I have found it best to ignore them and simply follow my trading plan for how I enter my iron condor positions. My only concession to all of the talk of corrections is to scale into my March position with ten contracts today and add more later.

Details

Written by Dr. Duke

Created: 20 January 2010

The markets opened down today based on a stronger dollar and some reported bank lending policy changes in China. But bullish sentiment is still predominant. Pullbacks such as today's are viewed as buying opportunities. Support levels have been established over the past couple of weeks for RUT at about $633 and SPX at about $1130. RUT hit $633 at about 11 am this morning and then traded steadily higher to close at $640, down a little less than $10 for the day. The SPX dipped below its $1130 support level twice today, but buyers came in and traded the SPX higher from about 1:15 pm into the close at $1138, down about $12 for the day. However, the predominance of bullish sentiment is of concern; often that is a sign of a market top. But one of the advantages of being a options income trader is that I don't have to predict the market's turns.

My Feb iron condor stands at a P/L of +$2,020, delta = -$17, and theta = +$82. Assuming no big changes in the market tomorrow, I will be establishing at least a portion of my March iron condors tomorrow.

Details

Written by Dr. Duke

Created: 19 January 2010

Apparently the bulls came back from the long weekend ready to buy in earnest. Citigroup's earnings report wasn't very positive in any respect: current quarter losses and a pretty pessimistic outlook. IBM reported earnings that beat expectations with a 9% increase, but this was with only a 1% increase in revenue growth - earnings delivered via cost cutting, not a sign of healthy growth. But the bulls were not to be dissuaded; they took the S&P 500 to new 52 week highs of $1150, up over $14 today. The Russell 2000 index (RUT) also closed at a new 52 week high at $649, up over $11. The previous highs were set last Thursday at $1148 and $646, respectively. These new highs also came in the face of a stronger dollar, a marked change from recent months. All this euphoria worries me.

My Feb iron condor stands at a P/L of +$1,380 with a position delta of -$62 and theta of +$106. The delta of the $690 calls = 11, so we are not yet close to adjusting, but this market seems pretty strong. But we trade what we see, not what we expect.