Transcript Butterfly Trading Strategies part 3 of 3, 2/4/12 John Locke Locke in Your Success, LLC. Know what you want, make it happen! I teach traders.

Butterfly Trading Strategies
part 3 of 3, 2/4/12
John Locke
Locke in Your Success, LLC.
Know what you want, make it happen!
I teach traders how to improve their trading and
become more profitable!
www.lockeinyoursuccess.com
© 2012 Locke in Your Success, LLC.
Part 2
Bearish Butterfly
The RUT bearish butterfly is a high probability,
low maintenance trading system that
automatically adapts to market conditions
and is designed to make as much money as
possible with the smallest possible exposure
to the market.
© 2012 Locke in Your Success, LLC.
A multi-butterfly position that is entered in
thirds and is started as a bearishly positioned
butterfly and then the position is scaled into as
the market rises
© 2012 Locke in Your Success, LLC.
If the RUT rises more than 20 points
from the entry price, add to the position
© 2012 Locke in Your Success, LLC.
IF RUT continues to rise to more
than 40 points over the entry price,
add to the position
© 2012 Locke in Your Success, LLC.
If RUT continues to rise?
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The position follows the market with a
rolling sequence based off of a reference
point that is determined at trade entry.
By following the rolling sequence the
position will gradually overtake the rising
price if the market continues to rise.
© 2012 Locke in Your Success, LLC.
This works extremely well
a majority of the time
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Down markets
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Sideways markets
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Choppy, volatile markets
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“Normally” rising markets
© 2012 Locke in Your Success, LLC.
What about extreme up markets
and grinding up markets?
The system automatically adapts to low
volatility and grinding up market conditions
by modifying add and roll points based on
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Total position Delta compared to position
size
Delta/Theta Ratios
© 2012 Locke in Your Success, LLC.
Let’s get into the trade!
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Approximately 56 DTE, enter a butterfly position in RUT with the
short strikes approximately 20 points below the current price.
Set your reference point at short strikes of the entry butterfly.
Record add and roll points which are based off of the reference
point as follows.
Reference
Reference
Reference
Reference
Reference
point
point
point
point
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
© 2012 Locke in Your Success, LLC.
Risk Management and
Profit Targets
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Trade will start with 10 contracts (butterflies) and scale to 30
contracts if fully scaled into.
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Planned Capital - $50,000
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Minimum Capital Suggested in Account - $100,000
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Profit Target - $15,000
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Reduced Profit Target - $5,000… 21 DTE or closer
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Max Loss - $15,000
© 2012 Locke in Your Success, LLC.
May 2011 Expiration
March 25, 2011 – 56 DTE
RUT = 826
Enter 10 put butterflies with short
strikes at 810
© 2012 Locke in Your Success, LLC.
Reference point = 810
Add second third at RUT > 850
Add last third at RUT > 870
First roll point at RUT > 880
© 2012 Locke in Your Success, LLC.
Delta and Delta/Theta Ratio
Guidelines
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Most of the time the trade can be managed strictly by the price
points, BUT, under certain conditions such as when IV is low or the
trade is close to expiration or options prices are being overly skewed
for any reason, the price point adjustments need to be modified to
deal with those conditions.
To indentify and adapt to these conditions we will monitor the Delta
and Delta/Theta Ratio of the position.
Override the normal adjustments to deal with those circumstances
when the predetermined values are hit.
The predetermined values vary depending on position size and what
stage of the trade you are in.
© 2012 Locke in Your Success, LLC.
For THIS position size, in THIS stage ONLY:
Max Delta is +/- 250
Max Delta/Theta ratio is +/- 1.5/1
© 2012 Locke in Your Success, LLC.
We do nothing till:
RUT = 770 or RUT =850
Delta > +/- 250
Delta/Theta Ratio > +/- 1.5/1
© 2012 Locke in Your Success, LLC.
6 days later, March 31
RUT is not past add point of 850 but Delta/Theta ratio is exceeded
which should not happen. The options prices are being skewed.
Since we did not exceed the add point, we do not add. Instead, to
compensate for the skew, we roll the existing position up 20 points.
© 2012 Locke in Your Success, LLC.
New Delta/Theta is 1/1
Add point remains 850
© 2012 Locke in Your Success, LLC.
New Position
© 2012 Locke in Your Success, LLC.
April 5
RUT has Exceeded 850
© 2012 Locke in Your Success, LLC.
Before Adjustment
© 2012 Locke in Your Success, LLC.
Add the second third to the position
Because we did a “forced roll” due to Delta previously,
the position has adapted to the conditions and the new
butterflies are put on ATM
© 2012 Locke in Your Success, LLC.
New Position
Next Add Point is RUT = 870
New Max Delta is +/- 500
Max Delta/Theta Ratio remains +/- 1.5/1
© 2012 Locke in Your Success, LLC.
April 25, 25 DTE, profit target is exceeded
Never had to deploy full capital to the position
$16,200 from $29,100 investment in 31 days
with unfavorable IV levels
© 2012 Locke in Your Success, LLC.
Pros
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“Usually” easy trade to manage
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Allows for wide range of price movement
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High returns with the potential for very big returns
when market behaves
Can trade with different instruments (RUT, SPX,
NDX)
© 2012 Locke in Your Success, LLC.
Cons
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Profit and loss fluctuates a lot
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Losses can be fairly large
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High Delta
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Grinding up months can be frustrating
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Profit target relies somewhat on RUT settling, or pulling back
© 2012 Locke in Your Success, LLC.
Dec 2011 Expiration
Oct 21, 2011 – 56 DTE
RUT = 707
Enter 10 put butterflies with short
strikes at 690
© 2012 Locke in Your Success, LLC.
Reference point = 690
Add second third at RUT > 730
Add last third at RUT > 750
First roll point at RUT > 760
© 2012 Locke in Your Success, LLC.
We do nothing till:
RUT = 650 or RUT =730
Delta > +/- 250
Delta/Theta Ratio > +/- 1.5/1
© 2012 Locke in Your Success, LLC.
Next trading day RUT
exceeds 730
© 2012 Locke in Your Success, LLC.
New position
Next add point RUT > 750
© 2012 Locke in Your Success, LLC.
Oct 27, 3 more days, RUT = 768, up over 60
points from entry, not only exceeding add
point, but also exceeding first roll point
© 2012 Locke in Your Success, LLC.
AHHHH!
© 2012 Locke in Your Success, LLC.
Add in the last 1/3 of the trade
Roll lowest butterflies up 60 points
© 2012 Locke in Your Success, LLC.
New Position
© 2012 Locke in Your Success, LLC.
6 days later
RUT pulls back to 719
© 2012 Locke in Your Success, LLC.
Position looks nice
© 2012 Locke in Your Success, LLC.
Nov 9, 37 DTE
© 2012 Locke in Your Success, LLC.
Nov 21, 25 DTE
Profit Target is Exceeded
© 2012 Locke in Your Success, LLC.
Graph
© 2012 Locke in Your Success, LLC.
Part 3
M21 Trade System
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Combines the scaling in advantages of the Bearish Butterfly
(M9) with the loss control techniques of the M3 and proper
trade planning to produce a high probability, high return
trading system.
Twice the monthly return of the M3
2/3 the monthly return of the bearish butterfly but may
outperform the Bearish Butterfly on a yearly level in certain
market environments
Better win rate than the Bearish Butterfly and the M3
© 2012 Locke in Your Success, LLC.
M21 Trade System
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In order to trade the M21, you
must fully understand all the
concepts of both the M3 trade
AND the M9 (Bearish Butterfly).
Otherwise you will not be able to
properly manage the trade!
© 2012 Locke in Your Success, LLC.
Starts out like an M3
© 2012 Locke in Your Success, LLC.
Go in with full number of butterflies
© 2012 Locke in Your Success, LLC.
Then use a reference points and roll points to adjust out
the position in thirds like the Bearish Butterfly
© 2012 Locke in Your Success, LLC.
1/3 adjusted out
© 2012 Locke in Your Success, LLC.
Butterflies get spread out and rolled
forward and back with price movement
© 2012 Locke in Your Success, LLC.
2/3 adjusted out
© 2012 Locke in Your Success, LLC.
Uses a combination of Greeks and
Greek Trends to determine
adjustments
© 2012 Locke in Your Success, LLC.
And uses Delta control
techniques of M3
© 2012 Locke in Your Success, LLC.
OV Examples
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Sept 2010 Exp. : down, then up
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Jan 2012 Exp. : up and up
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Bearish butterfly had big draw
downs both these months
© 2012 Locke in Your Success, LLC.
Risk Management and
Profit Targets
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Trade Size: 30 butterflies to 3 RUT calls
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B/C Ratio: 1/1 ratio=PC 50,000 per call
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Planned Capital - $150,000
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Profit Target - $30,000
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Reduce Profit Target - if B/C ratio is altered
Example 0.66/1 = ½ profit target – 0.33/1 = ¼ profit target
Max Loss - $30,000
© 2012 Locke in Your Success, LLC.
Locke In Your Success, LLC
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John Locke
www.lockeinyoursuccess.com
[email protected]
Facebook: Locke in Your Success
Twitter: locke4success
603-738-1795
© 2012 Locke in Your Success, LLC.
Just Released !!!
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I’ve teamed up with SMB Training, a premier Options Training
Firm based in NYC, and produced a comprehensive training
program that teaches the Bearish Butterfly Trading System.
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Check out the links below for more on the Bearish Butterfly:
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Purchase the Bearish Butterfly Training System here:
https://www.smbtraining.com/cart/checkout
© 2012 Locke in Your Success, LLC.
Important Links
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My website:
www.lockeinyoursuccess.com
My interview with Tim Bourquin of Traderinterviews.com:
http://www.traderinterviews.com/pro/2012-02-16_JohnLockeButterflyOptions.php
Direct link to the Bearish Butterfly Training Program, the first step in your
success to trading butterflies:
https://www.smbtraining.com/product/bearish-butterfly-options-strategy
One of my students with the M3:
https://smbcap.webex.com/ec0605ld/eventcenter/enroll/register.do?siteurl=s
mbcap&formId=4688957&confId=4688957&formType=1&loadFlag=1&event
Type=1&accessType=viewRecording
© 2012 Locke in Your Success, LLC.
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© 2012 Locke in Your Success, LLC.
Programs Currently in Development
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The M3 Trade System
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The M21 Trade System

Technical Analysis
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Using T/A to Adapt Income Trades

Proper Trade Planning and Risk Management

Executing Live Complex Options Spreads
© 2012 Locke in Your Success, LLC.