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SMB’s Options Tribe Meeting

SMB’s Options Tribe Meeting. December 13, 2011 . Randall Liss , former market maker on the European Options Exchange. A multi –month/multi-index butterfly strategy. Trade Initiation.

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SMB’s Options Tribe Meeting

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  1. SMB’s Options Tribe Meeting December 13, 2011

  2. Randall Liss, former market maker on the European Options Exchange • A multi –month/multi-index butterfly strategy.

  3. Trade Initiation • The principal is to put on a series of trades that have a 1:9 risk reward ratio. Butterflies are ideal for this. And this is accomplished by never paying more than 10% of the strike differential.

  4. Example EEM

  5. EEM October Call Butter • Top Long : paid= 1.00 • Bottom Long: paid= +1.78 • Two shorts: received=1.36X2= -2.72 .06 • Strike separation on EEM=1 point. • .06/1.00=6% which meets the standard (10% or less)

  6. Basics of the Trade • Only use cash settled, European style products. This basically means indices. • Look 2-4 months out. Look for liquidity. A good indication of liquidity is a large open interest, Preferably at your short strike. • Use a variety of indices and do a bull butterfly and a bear butterfly in each product. For example, 6 butterflies spread out over three indices. 2 domestic and one foreign. • Butterfly is a traditional butterfly--both wings must be equidistant from the short strike.

  7. Trading Tips • Use a sophisticated platform that accepts butterfly entry/exit as a single trade. • Only use limit orders and let the market come to you. No trade is always better than a bad trade. • If you pay .50 for a butterfly and your analysis program says you can lose more than .50, get a new program. If you are margined more than your debit for the butterfly find a new broker. • Ignore the greeks, don’t try to control them or you will mess up the trade.

  8. Trade Exit • When the profit on one of the two butterflies is equal to twice the total outlay of bothbutterflies in that product, then remove half of the profitable butterfly putting the trader into a no lose situation. • Leg in or out of these trades only at your extreme peril.

  9. Next week’s tribe meeting—Tuesday December 20, 2011 5pm EST • Tony Sizemore: Trading through management of the greeks.

  10. If you have any other questions….. • Email: sfreudberg@smbcap.com • Twitter: SethF _ SMB • Blog: smbtraining.com/blog • Options Training Program Details: www.smbtraining.com/overview/smb-options-training

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