Butterfly Strategies

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Transcript Butterfly Strategies

SMB TRAINING
OPTIONS TRAINING PROGRAM
Presents:
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1.
SMB TRAINING is NOT a Broker Dealer. SMB TRAINING engages in trader education and training. SMB TRAINING
offers a number of products and services, both electronically (over the internet through Smbtraining.com) and in
person. Through Smbtraining.com, SMB TRAINING offers the “Virtual Trading Floor”, a community through which
independent traders (subscribers), as well as T3 Trading Group, LLC traders, observe a virtual trading floor environment
(as described below) for educational purposes. SMB TRAINING also offers web-based, interactive training courses on
demand.
2.
The seminars given by SMB TRAINING are for educational purposes only. This information neither is, nor should
be construed, as an offer, or a solicitation of an offer, to buy or sell securities. You shall be fully responsible for any
investment decisions you make, and such decisions will be based solely on your evaluation of your financial
circumstances, investment objectives, risk tolerance, and liquidity needs.
3.
This material is being provided to you for educational purposes only. No information presented constitutes a
recommendation by SMB TRAINING or its affiliates to buy, sell or hold any security, financial product or instrument
discussed therein or to engage in any specific investment strategy. The content neither is, nor should be construed as,
an offer, or a solicitation of an offer, to buy, sell, or hold any securities. You are fully responsible for any investment
decisions you make. Such decisions should be based solely on your evaluation of your financial circumstances,
investment objectives, risk tolerance and liquidity needs.
4.
SMB Training and SMB Capital Management, LLC are separate but affiliated companies.
5.
T3 Trading Group, LLC is a Registered SEC Broker-Dealer and Member of the CBOE Stock Exchange
(CBSX www.CBOE.com). All trading conducted by contributors on Virtual Trading Floor is done through T3 Trading
Group, LLC.
6.
Any information contained in this presentation is for educational purposes ONLY. Neither Locke In Your
Success, LLC, John Locke nor it’s subsidiaries nor any of their respective officers, employees, representatives, agents or
independent contractors are, in such capacities, licensed financial advisors, registered investment advisors or registered
broker dealers. Neither do they provide investment nor financial advice nor make investment recommendations, nor are
they in the business of transacting trades. Nothing in this communication constitutes a solicitation, recommendation,
promotion, endorsement or offer (buy or sell) by Locke In Your Success, LLC, or others described above, of any
particular security, transaction or investment.
7.
The risk of loss in trading securities, options, futures and forex can be substantial. Customers must consider
all relevant risk factors, including their own personal financial situation, before trading. Options involve risk and are not
suitable for all investors. See the Options Disclosure Document: Characteristics and Risks of Standardized Options.
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following risk disclosure before considering the trading of this product: Forex Risk Disclosure. Futures and forex
accounts are not protected by the Securities Investor Protection Corporation (SIPC).
8. No relevant positions.
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Please note: Hypothetical computer simulated performance
results are believed to be accurately presented. However, they
are not guaranteed as to accuracy or completeness and are
subject to change without any notice. Hypothetical or
simulated performance results have certain inherent
limitations. Unlike an actual performance record, simulated
results do not represent actual trading. Since, also, the trades
have not actually been executed; the results may have been
under or over compensated for the impact, if any, of certain
market factors such as liquidity, slippage and commissions.
Simulated trading programs in general are also subject to the
fact that they are designed with the benefit of hindsight. No
representation is being made that any portfolio will, or is
likely to achieve profits or losses similar to those shown. All
investments and trades carry risks.
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Brought to you by
SMB Training
A World Leader in Options Education
Created and taught by
John Locke
Locke in Your Success, LLC.
“Know what you want, make it happen!”
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President of Locke In Your Success, LLC
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Options Trader
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Success Coach
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Options Trading Mentor
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The ROCK was specifically designed as a component of the
M21 trading system both as a standalone “position” and as
a means of gradually swapping back and forth between M3
and Bearish Butterfly configurations as market conditions
dictate.
The system will be demonstrated here as a “stand alone”
position and may be traded as a monthly, Market Neutral
trading approach.
The system can also be very effective as a modification
to both the Bearish Butterfly and M3 Trading Systems in
specific market conditions such as “run away” up
markets.
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This trade requires incremental adjustability and must be traded with
multiple contracts, therefore minimum suggested size is $50,000
Planned Capital if traded in RUT. If this does not fit in your comfort level,
do not trade it live.
This trade can be practiced with IWM however there are some risks
which include..
◦ A substantial amount of commissions which will negatively effect profit/loss.
◦ Using an ETF such as IWM carries both dividend and assignment risks.
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Prior to trading this system I STRONGLY RECOMMEND that you have
traded and you fully understand both the M3 and Bearish Butterfly trade
systems because, at times, this trade literally is an M3 or Bearish
Butterfly and this program does not directly address the M3 or Bearish
Butterfly guidelines.
All analysis and parameters are based off of OptionVue analysis software
with the default settings as of this writing. Results may vary significantly
if other analysis software is used or if incorrect settings are used.
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That you have been through and fully
understand both the M3 and Bearish Butterfly
Trading Programs. If you have not, this may
be very confusing, and likely, very costly for
you to trade. It is STRONGLY recommended
that you go back and learn those systems
prior to attempting this system.
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For the technical people out there, I am aware
that a number such as -100 is actually greater
than -200. However a majority of the people do
not instinctively think in this manner therefore….
For the purposes of this program and to avoid
confusion for a majority of people, when we refer
to a number as being greater than -200, we
mean a number such as -300. And if we say we
want a number less than -200 we mean a
number such as -100.
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The Rock was originally designed as a part of the M21
Trading System as well as a supplement for the M3 and
Bearish Butterfly systems.
The Rock, as presented here is a stand alone trading
system, which takes advantage of relatively flat market
conditions while being resilient enough to handle a
substantial amount of price movement in either direction.
The guidelines use indicators that “modify” and morph the
trade for the purpose of adapting to market conditions
and pricing skews both at entry and for the duration of the
trade.
The trade uses “loose guidelines” as in the M3
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Works best in flatter market conditions but will adapt to most
situations.
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Handles large trending moves fairly well in either direction.
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Is most risky to trade in markets when IV is very low and the
price movement is excessively choppy.
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Easily transitions into a M3 or Bearish Butterfly
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Makes an excellent adaptation to the M3 and/or Bearish Butterfly
in market conditions that are not optimal for those trades.
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Is an essential component of the upcoming M21 Trading System.
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Like the Bearish Butterfly the trade scales from a
small number of contracts up to 30 contracts.
The trade is considered 1/3 entered with 10
contracts, 2/3 entered with 20 contracts and fully
entered with 30 contracts.
Unlike the bearish butterfly the short strikes of
the trade are not always 20 points apart and the
trade is not always entered in 1/3’s but rather a
few contracts at a time. You will often be
somewhere “between” 1/3 and 3/3 scaled in,
rather than “at”1/3, 2/3 or 3/3 scaled in.
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This trade will swap back and forth between
multiple configurations.
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Rock, Modified Rock, M3, M3R, Cat and Bearish
Butterfly
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Guidelines will vary depending on configurations.
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The normal entry position is considered the
“ROCK” configuration.
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We will go over examples that cover all
configurations.
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For the demonstrations in this program, we will be using the
Russell 2000 index with a planned capital of $50,000. This is
the minimum recommended size for this trade.
We will be using both call and put butterflies (all butterflies will
have 50 point wings). We will also use ITM calls, OTM calls,
vertical spreads and individual options.
We start approximately 30 DTE by setting up 10 put butterflies
that are more than 10 points but no more than 20 points below
the price of the underlying.
We will then make a judgment about the market conditions
based on the Delta and from there we will either perform a
Normal ROCK entry, a Modified ROCK entry, an M3 entry or in
extreme cases a Bearish Butterfly entry (not shown in this
program)
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Normal ROCK entry:
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Modified ROCK entry:
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M3 and Bearish Butterfly entries:
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CAT
◦ Enter the put butterflies and then add a certain number of
call butterflies 40 points over our short strikes to bring
Delta into a specified range.
◦ Enter the put butterflies and then add 10 OTM calls at
approximately 5-10 Delta to cut our entry Delta back to
specified range.
◦ Performed per their respective guidelines
◦ CAT entry will be covered in the M21 program
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RUT Butterfly position size - $50,000 PC =10 contracts
scaling up to as many as 30 contracts.
All profit, loss, Delta and Theta numbers within these
guidelines are based off of a $50,000 PC position size.
If you are trading a different position size, you MUST
ADJUST YOUR NUMBERS ACCORDINGLY.
Delta/Theta ratios are ratios and remain the same
regardless of position size.
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Planned Capital “IS” a fixed number that we use to base our risk
management numbers off of which is “a reasonable representation of the
maximum amount of capital we are likely to have in the trade during an
average month”.
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Planned Capital “IS NOT” the maximum amount allowed in the trade.
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This position WILL sometimes significantly exceed Planned Capital.
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We need a planned number because…Trades with varying capital cannot
be properly managed with profits and losses based off of a percentage
of “whatever is in the trade” because these trades almost always have
substantially more money in them when they lose than they do when
they win.
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Using planned capital, your profit targets and maximum loss numbers
will be predetermined or “fixed” DOLLAR amounts.
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Planned capital may never reached or it may be exceeded, either way our
profit targets and loss numbers remain the same.
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Planned Capital - $50,000
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Minimum Capital Recommended in Account – 200% PC - $100,000
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Profit Target – 20% PC - $10,000
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Max Loss - 20% PC - $10,000
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Notes:
◦ All data in the course is based off of back test results during the period from
11/25/05 thru 12/30/12 while following the guidelines presented . All entries were
made at 3:30 PM EDT.
◦ A great majority of adjustments and exits were made at 3:30 PM EDT however the
daily range is considered in this trade and therefore there may be multiple
adjustments made intraday particularly near expiration.
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Entry: For the examples we will enter 30 DTE or closer if there
is a holiday or if the previous trade is still open. (no overlap
of months)
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Butterfly Positioning: Put butterflies with the short strikes 10
– 20 points below underlying (on RUT)
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We will model the put butterflies and check the Delta on the
T+0 line 20 points above the short strike.
◦ If Delta is greater than -200 (more negative than -200), we will use a
normal entry.
◦ If the Delta is less than -200 (less negative than -200), we use a high
IV entry (Modified ROCK or M3).
◦ If the numbers are “close” we will use the charts to decide.
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If we have determined that we will do a
normal entry and have entered the put
butterflies….
Add call butterflies with 50 point wings
placing our short strikes 40 points over the
short strikes of the existing put butterflies
until our Delta at 20 points over the short
strikes of the put butterflies is less than -200
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In higher IV environments we tend to get very large price
swings. Under these conditions, trying to keep our trade
high Theta usually results in excessive trade adjustments
as well as unneeded losses. Therefore, it usually makes
sense to adapt our position to create a flat T+0 line and
not worry about being “under the tent”.
The ROCK uses the Delta of our put butterflies at a price
point of 20 points over its short strikes as a guideline of
when the market is too volatile for a normal entry and
adapts by using a modified entry.
The position is then traded in a modified configuration
until such a time the Delta indicates we would likely be
better off in normal configuration.
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Entry: For the examples we will enter 30 DTE or closer if there
is a holiday or if the previous trade is still open. (no overlap
of months)
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Butterfly Positioning: Short strikes 10 – 20 points below
underlying (on RUT)
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Check the Delta on the T+0 line 20 points above the short
strike.
◦ If Delta is greater than -200 (more negative than -200), we will use a
normal entry.
◦ If the Delta is less than -200 (less negative than -200), we use a high
IV entry.
◦ If the numbers are “close” use the M3 entry.
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Model entering the 10 put butterflies and then add10 OTM calls with
sufficient Delta to cut our position significantly Delta under -50
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Check to see if the calls we modeled are under 10 Delta
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IF the calls are under 10 Delta, then proceed with Modified ROCK entry
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IF the calls need to be more than 10 Delta to get our position Delta
under -50, then perform an M3 entry using M3R guidelines for timing
the trade conversion back into ROCK configuration.
IF you could go either way, check the chart to see if the market is
experiencing excessive chop or it is trending.
◦ If market is excessively choppy use Modified ROCK entry.
◦ If market is trending, use the M3 entry
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Advantages of OTM calls
◦ If you get a fast aggressive up move, they can provide very good protection
◦ If you get an aggressive down move, they do not hurt the position as much as
an ITM call or vertical does
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Disadvantages of OTM calls
◦ If the prices sits, time goes by, you get only a moderate move in either
direction or a substantial volatility drop then the calls WILL lose money and hurt
the position. In fact, I would say you will lose money over 80% of the time on
those calls
◦ Your T+0 line is fictitious and will most likely collapse substantially to the
upside when a move does occur
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The only reason we are using OTM calls here is because
conditions dictate that we may get an extreme move, even so, it
will usually cost us. Therefore, we want to get rid of those calls
as soon as conditions allow and switch back over to ROCK or M3
configuration.
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An M3 entry should be considered when the
Delta of the put butterflies is closer to -200
or when IV is high and price movement is
trending rather than in a wide range of chop
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In this section we covered:
◦ The 6 configurations of the trade
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Normal Rock
Modified Rock
M3
M3R
CAT
Bearish Butterfly
◦ The 3 most common ROCK trade entries
 Normal Rock
 Modified Rock
 M3
◦ How to use Delta numbers as an aid to determine which entry to
use
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Adjustment Guidelines for various
configurations
A Simple Sample Trade November 2012
Expiration
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John Locke
www.lockeinyoursuccess.com
[email protected]
Facebook: Locke in Your Success
Twitter: locke4success
603-738-1795