The rut bearish butterfly
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The RUT Bearish Butterfly. SMB Training OPTIONS TRAINING PROGRAM A Somewhat Average Month. Disclaimer.

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The RUT Bearish Butterfly

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The rut bearish butterfly

The RUT Bearish Butterfly

SMB Training

OPTIONS TRAINING PROGRAM

A Somewhat Average Month


Disclaimer

Disclaimer

  • 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. Trading foreign exchange on margin carries a high level of risk, as well as its own unique risk factors. Please read the 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).


Position size

Position Size

  • 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.


Risk management and profit targets

Risk Management and Profit Targets

  • Planned Capital - $50,000

  • Minimum Capital Required in Account - $100,000

  • Profit Target - $15,000

  • Reduced Profit Target 21 DTE - $5,000

  • Max Loss - $15,000

  • 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.


Trade exits

Trade Exits

  • 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.


Trade set up

Trade Set Up

  • 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


Matrix on entry

Matrix on Entry


Graph on entry

Graph on Entry


Price chart on entry

Price Chart on Entry


April 11 2008 three weeks later

April 11, 2008Three Weeks Later


Analyze graph

Analyze Graph


April 18 2008 maximum delta theta ratio of 1 5 1 is exceeded

April 18, 2008Maximum Delta/Theta Ratio of 1.5/1 is Exceeded


Graph before adjustment

Graph Before Adjustment


The rut bearish butterfly

Since we did not reach the add point of 720, we will roll the 680 butterflies to 700 instead of adding to the position


Position after adjustment

Position After Adjustment


April 25 2008 rut has exceeded 720 add point

April 25, 2008RUT has Exceeded 720 Add Point


Position before adjustment

Position Before Adjustment


Add 670 720 770 butterflies

Add 670/720/770 Butterflies


Graph of new position

Graph of New Position


Price chart

Price Chart


April 29 2008 profit target is hit

April 29, 2008Profit Target is Hit


April 28 2008 analyze graph

April 28, 2008Analyze Graph


Taking the trade into expiration

Taking The Trade Into Expiration

  • 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.


Guidelines for trading past your profit target and into expiration

Guidelines For Trading Past Your Profit TargetandInto Expiration

  • 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.


Trading close to expiration can be rewarding but it is risky

Trading close to expiration can be rewarding but it is risky

  • 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.

  • Gain and lose significant amounts of money with relatively small price movements.

  • Because of the additional risk, we need to take precautions and trade differently.

  • Must constantly and objectively weigh the risk of staying in the position.

  • Takes more skill than simply “following guidelines”.


Must be willing to lose money in order to make more money

Must be willing to lose money in order to make more money

  • 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!


Always know your exit points

ALWAYSknow your exit points

  • 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!


Must be available to monitor the market and adjust as needed

Must be available to monitor the market and adjust as needed

  • 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.


Incrementally adjust your position

Incrementally Adjust Your Position

  • 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.


Focus on the results you expect not on the mechanics for doing the job

"Focus on the results you expect, not on the mechanics for doing the job."

  • 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


New delta guidelines

New Delta Guidelines

  • 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.


Intraday delta guidelines

Intraday Delta Guidelines

  • 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.


10 00 am and 3 30 pm delta guidelines

10:00 AM and 3:30 PM Delta Guidelines

  • 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.


Exit guidelines

Exit Guidelines

  • 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.


May 2008 expiration april 29 2008 under 21 dte profit target is hit

May 2008 ExpirationApril 29, 2008Under 21 DTE Profit Target is Hit


April 29 2008 analyze graph

April 29, 2008Analyze Graph


April 29 2008 situation

April 29, 2008Situation

  • 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


The rut bearish butterfly

We are now watching the market periodically throughout the day and using expiration guidelines May 1, 2008 – Maximum Delta of 500 is Exceeded


Graph before adjustment1

Graph Before Adjustment


Add 10 740 butterflies

Add 10 - 740 Butterflies


New position

New Position


May 2 2008 10 30 am maximum delta of 500 is exceeded

May 2, 2008 10:30 AMMaximum Delta of 500 is Exceeded


Graph before adjustment2

Graph Before Adjustment


Remove 4 700 butterflies

Remove 4 - 700 Butterflies


New position1

New Position


The rut bearish butterfly

May 6, 2008 – 3:30 PM Maximum Delta of 500 is ExceededWe are 10 DTE and must monitor position more regularly


Graph before adjustment3

Graph Before Adjustment


Remove 5 700 butterflies

Remove 5 - 700 Butterflies


New position2

New Position


May 7 2008 3 30 pm maximum delta going into close is exceeded

May 7, 2008 – 3:30 PMMaximum Delta Going Into Close is Exceeded


Graph before adjustment4

Graph Before Adjustment


Add 5 700 butterflies

Add 5 - 700 Butterflies


New position3

New Position


May 8 2008 3 30 pm maximum delta going into close is exceeded

May 8, 2008 – 3:30 PMMaximum Delta Going Into Close is Exceeded


Graph before adjustment5

Graph Before Adjustment


Add 1 700 butterfly

Add 1 - 700 Butterfly


New position4

New Position


May 12 2008 12 00 pm maximum delta of 500 is exceeded 15 000 profit target is exceeded

May 12, 2008 – 12:00 PMMaximum Delta of 500 is Exceeded$15,000 Profit Target is Exceeded


Graph before adjustment6

Graph Before Adjustment


Remove 3 700 butterflies

Remove 3 - 700 Butterflies


New position5

New Position


May 12 2008 2 30 pm maximum delta of 500 is exceeded

May 12, 2008 – 2:30 PMMaximum Delta of 500 is Exceeded


Graph before adjustment7

Graph Before Adjustment


Remove 2 700 butterflies

Remove 2 - 700 Butterflies


New position6

New Position


May 12 2008 3 30 pm maximum delta of 250 going into close is exceeded

May 12, 2008 – 3:30 PMMaximum Delta of 250 Going Into Close is Exceeded


Graph before adjustment8

Graph Before Adjustment


Remove 2 700 butterflies buy 1 760 butterfly

Remove 2 - 700 ButterfliesBuy 1 – 760 Butterfly


New position7

New Position


May 13 2008 3 00 pm maximum delta of 500 is exceeded

May 13, 2008 – 3:00 PMMaximum Delta of 500 is Exceeded


Graph before adjustment9

Graph Before Adjustment


Add 3 760 butterflies

Add 3 - 760 Butterflies


New position8

New Position


May 14 2008 10 00 am maximum delta of 500 is exceeded

May 14, 2008 – 10:00 AMMaximum Delta of 500 is Exceeded


Graph before adjustment10

Graph Before Adjustment


Add 2 760 butterflies

Add 2 - 760 Butterflies


New position9

New Position


May 14 2008 10 30 am maximum delta of 500 is exceeded

May 14, 2008 – 10:30 AMMaximum Delta of 500 is Exceeded


Graph before adjustment11

Graph Before Adjustment


Add 3 760 butterflies1

Add 3 - 760 Butterflies


New position10

New Position


May 15 2008 decision time would you expire the trade

May 15, 2008Decision TimeWould You Expire the Trade?


Expiration graph

Expiration Graph


How about if we do this buy back all 720 puts buy 10 710 puts sell 7 760 puts

How About If We Do This? Buy Back All 720 PutsBuy 10 - 710 PutsSell 7 - 760 Puts


Graph after adjustment

Graph After Adjustment


The rut bearish butterfly

RUT Opened the following day at 744.50 and traded down to 737 buy 10:00 Settlement should have been around 740


Trade should have made between 24 000 and 27 000

Trade should have made between $24,000 and $27,000


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