Transcript The RUT Bearish Butterfly

SMB TRAINING
OPTIONS TRAINING PROGRAM
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The RUT bearish butterfly is a trading system that is designed
to make as much money as possible with the smallest
possible exposure to the market. It starts out with a small
amount of capital as a bearishly positioned butterfly with the
position size increasing only if the market rises.
The trade typically has a greater range than a wide iron
condor with a much higher profit potential.
The trade sometimes has “bonus” months where you can
make well past profit target.
The Bearish Butterfly:
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Works the best in volatile, choppy, down trending markets and does
very well in sideways markets and choppy up trending markets.
Is most risky to trade and can difficult to manage in smooth, strong
up trending markets but it usually works.
Normally has a range of up to 150 – 300+ points on the downside
and up to 60 – 120 points to the upside, depending on the timing of
the moves, before maximum loss number are hit. This range can be
drastically reduced however in unfavorable market conditions ( IE.
An abnormally low implied volatility environment), late in the trade
or if a whipsaw occurs.
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The trade starts out approximately 56 days prior to
expiration by entering 1/3 of the position as a
butterfly with 50 point wings.
The trade is entered negative Delta with the short
strikes approximately 20 points below the current
market price.
The trade is scaled into as the price goes up, and
follows the market while increasing position size.
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The initial “core guidelines” are a starting point for
learning the trade and they work very well.
Once you’ve mastered the core guidelines, you can
take steps to get more out of the trade which will
be discussed later in the course.
Guidelines may seem complex at first but are really
straight forward if learned one step at a time.
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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 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 and is a reasonable representation of
the maximum amount of capital we are likely to have in the trade
during an average month.
“Planned Capital” is NOT the maximum amount allowed in the trade.
In low volatility months with large price moves or if trading into
expiration, your capital may substantially exceed the planned
amount.
Trades with escalating capital cannot be properly managed with
profits and losses based off of a percentage of a variable number
because scaling trades almost always have substantially more money
in them when they win lose than they do when they win.
We must use a planned, fixed number in order to properly manage
the trade.
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Total Delta – Is the position Delta number at any
given time.
Delta / Theta Ratio – Is the total Delta divided by
the Theta number at any given time over 1. It is
expressed as x.x Delta/1 Theta.
Note: Throughout this course, when we state that Delta, Theta or Delta/Theta
ratios cannot exceed a given number, we are referring to the “absolute value”
of that number. For example, if we state Delta cannot be greater than
(-100) we mean (-101) is a problem, NOT (-99). If we state that Delta
cannot be greater than 100, we mean more than 100 as in +101 is a
problem but also more than (-100) as in (-101) is a problem.
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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 data in the course is based off of back test results during the
period from 11/25/05 thru 9/15/11 while strictly following the core
guidelines . All decisions, entries, exits and adjustments are made
at 3:30 PM EDT. The daily range is ignored, except where noted.
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Exit 1 – ($15,000) profit target hit
Exit 2 – ($5,000) 33% profit target is hit 21 DTE or
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.
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The trade is entered in thirds with the first 1/3
being entered 56 days prior to expiration.
Entry first 1/3: Buy 10 put butterflies, OR sell iron
butterflies, with 50 point wings 15-25 points
below RUT price. We will use put butterflies.
Entry first 1/3 modification: If the Delta/Theta
ratio is greater than 1.5/1, enter the market 10
points closer to the RUT price than normal.
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Once the position is entered, we will use the short or center
strikes of the entry butterflies as an initial reference point to
determine when we can take certain actions during the trade.
If at any point during the trade we have butterflies with the
short strikes at a lower value than the entry butterflies, the
reference point will be moved to the lower strikes.
The reference or control point is always the short or center
strikes lowest butterflies that were entered at any time during
the trade.
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The “basic” scale in strategy from here is to add when the
market exceeds 40 points over the reference point and then
again when the market exceeds 60 points over the reference
point. From there, if the market exceeds 70 points past the
reference point, you may begin your rolling sequence
depending on specific conditions.
For the purposes of this program, the reference point is the
short strikes of the lowest positioned butterfly that was
present at any time during the duration of the trade.
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Strictly from a point basis, this trade is scaled into or
adjusted to the upside as follows:
Reference point
Reference point
Reference point
Reference point
Reference point
Reference point
Reference point
Reference point
+40 – add second 1/3
+60 – add last 1/3
+ 70 – roll lowest butterfly +60
+ 80 – roll lowest butterfly +60
+ 90 – roll lowest butterfly +60
+ 100 - roll lowest butterfly +60
+ 120 - roll lowest butterfly +60
+ 140 - roll lowest butterfly +60
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Once you choose your entry short strikes, make note of
those strikes as your reference point and record the
price points where you are allowed to enter your second
and last thirds of the trade as well as your roll points.
For example, if you enter the first 1/3 the trade with
460 short strikes, your 2/3 would be entered when RUT
exceeds 500 and your 3/3 would be entered would be
entered when RUT exceeds 520 and your rolls would
start when RUT exceeds 530 with subsequent rolls at
540, 550, 560, 580 and 600.
The position size will be increased only if the add point
is exceeded.
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A large enough down move occurs that the initial butterfly was
repositioned at a lower strike in which case, you would look at the
short strike of your lowest butterfly and reset the reference point.
In rare cases, discussed later, where the market implied volatility is
exceptionally low or you are very close to expiration and the 2/3 is
“needed” in order to “safely” deal with the range.
You are trading the variation of the plan that allows adding to the
position on a down side move. This “core” version of the plan does
not allow you to add to the position due to a down move except
under the rare circumstances described above.
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RUT price rises to 40 points
above the reference point, add 10
put or iron butterflies 50 point
wings 20 points over the existing
butterflies.
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When RUT price rises to 60 points above the
reference point, add 10 put or iron butterflies
50 point wings 20 points over the highest
butterflies.
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Maximum Delta with 1/3 position is 250
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Maximum Delta with 2/3 position is 500
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Maximum Delta with 3/3 position is 750
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Maximum Delta/Theta Ratio is 1.5/1
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When these values are exceeded, the position will
be adjusted assuming specific price point criteria
are met
RUT price is less than 40 points over the reference point.
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Roll the butterfly 20 points up IF:
Delta exceeds -250… AND… price is more than 20 points
above the short strikes of the butterflies.
The Delta / Theta ratio is greater than 1.5/1 … AND… price
is more than 20 points above the short strikes of the
butterflies.
Roll the butterflies back to the closest ATM strike IF:
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RUT price exceeds 40 points below the short strike.
The Delta/Theta ratio is greater than 1.5/1 ..AND.. price is
outside the expiration break even at the point where the
break even crosses the 0 profit.
The Delta exceeds 250 …AND.. price is outside the
expiration break even at the point where the break even
crosses 0 profit.
Remember to reset your reference point!
RUT price is less than 60 points over the reference point.
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Roll the lowest butterflies up 40 points IF:
Delta exceeds -500 ..AND… price is more than 10 points
past the short strike of the upper butterflies but less than 60
points from the reference point.
Delta Theta ratio is greater than 1.5/1 ..AND... price is more
than 10 points past the short strike of the upper butterflies
but less than 60 points from the reference point.
Remove higher strike butterfly and trade with 1/3 position IF:
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Delta exceeds 500.
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Delta / Theta ratio is greater than 1.5/1.
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The price is outside the expiration break even at the point
where the break even crosses 0 profit.
From here you may adjust to the upside
because of two reasons:
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If maximum Delta numbers are exceeded.
If the roll point values from the reference point
are hit.
Adjusting due to Delta numbers being exceeded:
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Roll lowest butterfly forward 60 points IF:
Delta exceeds -750… AND… price is past the short strike of the
upper butterflies.
Delta Theta ratio is greater than 1.5/1 ..AND.. price is past the
short strike of the upper butterflies.
Remove the lowest positioned butterflies and wait till price
exceeds the short strike of upper butterflies to complete the roll
IF:
If Delta the above Delta numbers are exceeded and the price is
NOT past the short strike of the upper butterflies.
Adjusting due the point values from the reference point being
hit:
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Use the chart below:
Reference point
Reference point
Reference point
Reference point
Reference point
Reference point
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70 – roll lowest butterfly +60
80 – roll lowest butterfly +60
90 – roll lowest butterfly +60
100 - roll lowest butterfly +60
120 - roll lowest butterfly +60
140 - roll lowest butterfly +60
If you adjust the position for either reason, before making the
adjustment, check to see if:
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The position Delta will be under - 100 after the roll.
If Delta / Theta ratio is still greater than 1.5 / 1 or -750 Delta
after the roll.
If you removed the lowest butterflies, check to see if the
remaining position is greater than 1.5 / 1 or -500 Delta.
If the position will be under –100 Delta after the roll.
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Remove the lowest butterfly instead of rolling and
recheck your Delta/Theta ratio to see if the remaining
position is greater than 1.5/1 or -500 Delta.
If, the remaining position is greater than 1.5/1 or -500
Delta, check if you can roll the lowest butterflies up 40
points without going under -100 Delta/Theta ratio, if
not, look at removing the “new” lowest butterflies
instead of rolling.
If Delta / Theta ratio is still greater than 1.5 / 1 or -750
Delta after the roll.
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Perform a double roll and move the butterfly up 60
points from its position as well and check to see if you
have gone under (-) 100 Delta.
If so, remove the “new” lowest butterflies and recheck
your Delta and Delta/Theta ratio.
Remove the highest butterfly and trade with two thirds of
the position:
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If Delta exceeds +750.
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If the Delta Theta ratio is greater than 1.5/1.
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If the price is below the short strikes of the lowest
butterflies… AND... Delta/Theta ratio is higher than
0.75/1.
If the price is $20 below the short strikes of the lowest
butterflies, remove the highest price butterfly
regardless of the Delta / Theta ratio.