Transcript The RUT Bearish Butterfly

SMB Training
OPTIONS TRAINING PROGRAM
A Somewhat Average Month
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1.
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RUT Butterfly position size - 10 contracts scaling to 30.
All profit, loss, Delta and Theta numbers within these
guidelines are based off of the above position size.
If you are trading a different position size, you will need
to adjust these numbers accordingly.
Delta/Theta ratios are the same regardless of position
size.
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Planned Capital - $50,000
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Minimum Capital Required in Account - $100,000
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Profit Target - $15,000
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Reduced Profit Target 21 DTE - $5,000
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Max Loss - $15,000
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All decisions are made at 3:30 PM EDT. The daily range is ignored.
UNLESS the trade is over profit target or under 9 DTE and we choose
to stay in the position.
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Exit 1 – ($15,000) profit target hit
Exit 2 – ($5,000) 33% profit target is hit 21 DTE of closer
Exit 3 – Friday before expiration
Exit 4 – Maximum loss number ($15,000) is exceeded at 3:30
PM EDT.
Exit 5 – Any time the preponderance of evidence shows that
the position is more likely to lose money than to make money
if we stay in the trade AND it cannot be corrected.
If we choose to stay in the position after exit points are hit,
the position will be monitored and adjusted as needed.
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Date:
March 24, 2008
RUT Price:
699.80
Entry Strikes: 680
Purchase 10 – 630/680/730 Put Butterflies
Control Point: 680
Add Points:
720/740
Roll Points:
750/760/770/780/800
First Downside Adjustment: 640
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It has been a relatively easy month.
According to the core guidelines, the trade needs to be exited
today.
More experienced traders who are willing to risk losing a
significant amount of money can stay in the trade and even
bring it into expiration in order to do so.
However we have decided to take the trade into expiration.
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Must be willing to lose money in order to make
more.
Must ALWAYS know your exit point.
Must be able to monitor the market and adjust as
needed.
Must be able to incrementally adjust your position.
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The closer you are to expiration the more vulnerable the trade
is to a large price movement, even if you are up a significant
amount of money.
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Gain and lose significant amounts of money with relatively
small price movements.
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Because of the additional risk, we need to take precautions
and trade differently.
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Must constantly and objectively weigh the risk of staying in
the position.
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Takes more skill than simply “following guidelines”.
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Once you hit your profit target or are at the Friday
before expiration, in order to stay in the trade, you
must be willing to risk at least 20% of your planned
capital, in this case about $10,000, if not, it is time
to GET OUT!
ANYTIME you are no longer willing to risk losing a
reasonable amount of money. It is time to GET
OUT!
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I’ve seen too many times where people have
exceeded their profit targets and then proceeded
to take much more than a maximum loss on a
trade.
To avoid this, you MUST KNOW at all times the
price points you will exit and the dollar amount of
profit or loss you will exit at.
You MUST HAVE THE DISCIPLINE to stick to those
numbers!
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I typically check trades once per day as I have
no desire to sit there and watch the stock
market all day. However, when I CHOOSE to
trade closer than10 DTE I know I need to
monitor the market to control my risk.
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You must be able to make small enough
adjustments to control risk without over
adjusting the position and opening up
yourself to getting chopped out of the
trade.
If you find yourself getting chopped up,
EXIT THE TRADE and move on to the next
month.
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It is imperative that you stick to your risk management
rules, your results, but it is equally important that you
do NOT get caught up in the mechanics of the trade.
Your “job” in the trade is to make as much as you can
WHILE STAYING WITHIN YOUR RISK MANAGEMENT
RULES.
Do whatever is necessary to keep the probability of
winning in your favor and when you cannot, EXIT THE
TRADE
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These guidelines are for the bearish butterfly trade on RUT, starting
with 10 contracts, scaling to 30. The numbers must be modified if
trading a different position size.
These guidelines are only to be used when trading near expiration
or when the profit target is exceeded AND you choose to stay in the
position.
These guidelines can be loosely followed if the profit target has not
been achieved or if it has been achieved and the trade is over 7 DTE
but should be strictly followed if the trade has hit profit target AND
it is 7 DTE or closer. Of course the closer you are to your target and
expiration, the more closely you should follow these guidelines.
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Intraday 10 AM EST – 3:30 PM EST maximum
position Delta is +/- 500.
When Delta is exceeded, remove, add or reposition
butterflies to correct delta to between 300 and
450. The Delta must remain the same sign. IE. –
550 Delta would be corrected to – 350 Delta NOT +
350 Delta.
Maximum size is 30 contracts.
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AT 3:30 PM EST maximum position Delta is +/250.
Delta prior to 10:00 AM and after the 3:30 PM
adjustment is made, will be ignored.
If Delta is greater than +/- ~250, Adjust Delta to
between 200 and ~250. The Delta must remain the
same sign. IE. –550 Delta would be corrected to
-250 Delta NOT + 250 Delta.
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Whenever you hit your predetermined numbers OR you are not
willing to lose additional money.
Whenever you are satisfied with your profit.
Whenever a 15 point overnight more will put you past your
maximum loss number and you cannot reasonably correct the
position.
Whenever Gamma is so high that you cannot withstand “regular”
price movements without constantly adjusting the position. IE.
Whenever the position becomes unmanageable.
Whenever you feel the odds of making more money are no longer in
your favor.
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Up $6340, which is past the reduced profit target
per guidelines.
How much am I willing to risk at to stay in? 10K
Can I adjust the trade to meet my new Delta
guidelines and take an overnight move of at
least15 points and not exceed my loss numbers?
What is my exit point? When trade is down $3700