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SMB TRAINING OPTIONS TRAINING PROGRAM Presents:. The M3 Trading System Part 2 Extreme Volatility, October 2011 Expiration. Brought to you by SMB Training A World Leader in Options Education Created and taught by John Locke Locke in Your Success, LLC.

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SMB TRAINING

OPTIONS TRAINING PROGRAM

Presents:


The m3 trading system part 2 extreme volatility october 2011 expiration
The M3 Trading SystemPart 2 Extreme Volatility, October 2011 Expiration

  • Brought to you bySMB Training

    A World Leader in Options Education

    Created and taught by John Locke

    Locke in Your Success, LLC.

    “Know what you want, make it happen!”


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).

  • 8. No relevant positions.


Hypothetical trades disclaimer
Hypothetical Trades Disclaimer

  • Please note: Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commisions. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.


October 2011 expiration risk management and profit targets
October 2011 ExpirationRisk Management and Profit Targets

  • Trade Size: 1 RUT or 10 IWM Calls

  • Butterfly Call Ratio: 20 Butterflies to 1 RUT Call (2/1 ratio)

  • Planned Capital - $75,000

  • Profit Target - $7,500

  • Max Loss - $7,500


Entry position price chart october expiration 2011
Entry Position Price ChartOctober Expiration 2011

We’ve had the crash and are entering into extremely volatile market conditions


Entry position october 2011expiration
Entry PositionOctober 2011Expiration





Next day august 30 rut is up another 12
Next Day, August 30RUT is up another $12



Situation
Situation

  • Delta, Theta and Gamma are OK

  • Positive Vega creates possibility of T+0 line collapsing

  • Best Options

    (RUT has been up 62 points in 2 trading days!)

  • Roll Butterflies Up

  • Add Vertical Spread





15 days later september 14 37 dte
15 Days LaterSeptember 14 – 37 DTE



8 days later september 22 29 dte
8 Days LaterSeptember 22 – 29 DTE




Situation1
Situation

  • Delta, Theta, Vega and Gamma are OK

  • Negative Gamma trend combined with positive Delta and negative Vega to the downside creates a excessive downside price movement risk

  • Best Options

    (RUT has been down 60+ points in 2 trading days, still 29 DTE and IV is very high!)

  • Roll butterflies down

  • Add put options




11 days later october 3 18 dte
11 Days LaterOctober 3 – 18 DTE





What would you do
What would you do?

  • Add puts

  • Remove calls

  • Remove bullish verticals or add bearish verticals

  • Nothing


Adding puts
Adding Puts

  • Correct Gamma trend

  • Correct Delta

  • Things to consider…

  • We just had a major support break and put prices will be insanely expensive with a further downside move already priced into them. Therefore “IF” we are wrong and the market reverses, stabilizes or even continues to go down slowly, then we will likely lose a significant amount of money which may result in an unnecessary loss.


Removing calls removing bullish verticals or adding bearish verticals
Removing calls, removing bullish verticals or adding bearish verticals

  • Correct Delta

  • Things to consider

  • Selling the calls, removing bullish and/or adding bearish verticals will help considerably to the downside. But it will also CREATE a Gamma trend problem to the upside. If the market stays put you’ll do fine but IF you are wrong and a hard whipsaw occurs then you will likely create an unnecessary loss.


Doing nothing
Doing nothing verticals

  • Hey the Delta/Theta ratio is fine.

  • Why let the fact that RUT has dropped over 80 points in 4 days and broken a major support line concern you…. But even so, doing nothing is probably a better choice than the other things we mentioned although a bit irresponsible.


A safer approach
A safer approach verticals

  • Roll the butterflies back.

  • Correct Delta and allows more downside room without the negative effect of hurting the position if the market reverses.



Oops don t forget about the call
Oops! verticalsDon’t forget about the call.


Roll back call
Roll Back Call verticals


New position1
New Position verticals


2 days later october 5 16 dte
2 Days Later verticalsOctober 5 – 16 DTE


Matrix
Matrix verticals


Analyze graph3
Analyze Graph verticals


2 days later october 7 14 dte rut up 8 more points
2 Days Later verticalsOctober 7 - 14 DTE RUT up 8 more points


Analyze graph4
Analyze Graph verticals



New position2
New Position verticals


Next trading day rut is up 20 more points
Next trading day verticalsRUT is up 20 more points


Analyze graph 11 dte
Analyze Graph verticals11 DTE



Situation2
Situation verticals

  • Delta and Gamma are OK

  • Positive Vega creates possibility of T+0 line collapsing

  • Negative Theta this close to expiration will collapse T+0 line even faster

  • Best Options

    (RUT has been up 75 points in 4 trading days!)

  • Roll butterflies up

  • Add Vertical Spreads




2 days later 9 dte rut is at 701 up another 20 points
2 Days Later – 9 DTE nowRUT is at 701Up Another 20+ Points




I sold 20 – 600 butterflies and bought 10 – 650 butterflies. I altered the butterfly/call ratio. I did this because the expense of buying 20 butterflies this late in the trade would throw off the balance between the butterflies and the calls.



New position3
New Position margin


New position 9 dte
New Position margin9 DTE


2 day later october 14 7 dte rut up 10 more points
2 Day Later marginOctober 14 – 7 DTERUT up 10 more points



Price chart1
Price Chart margin



New position 7 dte
New Position margin7 DTE


3 days later october 17 4 dte
3 Days Later marginOctober 17 – 4 DTE


Price chart2
Price Chart margin



Next day 3 dte rut is up 14 points position is negative theta again
Next Day - 3 DTE margin RUT is up 14 points Position is negative Theta….. AGAIN!!


I should take the money if i choose to stay in time to get into the tent
I should take the money?? marginIf I choose to stay in…Time to get into the tent


Adjustment
Adjustment margin


Analyze graph7
Analyze Graph margin

I would be concerned about downside risk


Sell useless 600 and 640 puts, buy back 650 short puts, buy 10 - 660 long puts and buy 10 - 740 long calls


New position4
New Position 10 - 660 long puts and buy 10 - 740 long calls


New position with 10 iv increase
New position with 10% IV increase 10 - 660 long puts and buy 10 - 740 long calls


Expiration thursday
Expiration Thursday 10 - 660 long puts and buy 10 - 740 long calls


Do you want to expire the trade
Do you want to expire the Trade? 10 - 660 long puts and buy 10 - 740 long calls


Trade expiration
Trade Expiration 10 - 660 long puts and buy 10 - 740 long calls

  • RUT does not settle on Thursday night!

  • The RUT settlement is calculated by taking the opening price of each of the Russell 2000 stocks on Friday.

  • An issue with this process is that the stocks do not start trading at the same time nor are they equally “weighted”. This means that the settlement value can be significantly different than both the closing price on Thursday and opening price of RUT on Friday.

  • In some cases the settlement price can even be outside the range of the RUT daily bars on both days.

  • Make sure you have plenty of room!


This example went through
This example went through… 10 - 660 long puts and buy 10 - 740 long calls

  • Entry in an extreme high volatility environment

  • Very bad entry timing and a situation where the market “took our money”

  • Extreme up and down moves in a range of 130 +/- points

  • Position drew down less than ½ our max loss

  • Position was checked only 1 time per day

  • Never took excessive risk in either direction

  • This win did not hinge on exact timing of adjustments nor speculating on a market direction!


Summary
Summary 10 - 660 long puts and buy 10 - 740 long calls

  • This trade was entered in an extremely volatile market environment.

  • We had a very large, fast up move immediately after the position was entered which created a Vega problem.

  • After considering the violent reversals and very large price fluctuations that were being experienced at the time, we chose to add vertical spreads rather than roll up the butterflies to control our Vega risk because we did not want to take on the downside risk associated with rolling up the butterflies.

  • When the price reversed to the down side, we chose to roll the butterflies back several times rather than to add OTM put options because put option prices tend to be over inflated with violent down moves and buying put options at an over inflated price can create large, unneeded losses if the market stabilizes, reverses or continues down at a slow pace. Buying puts in this situation typically requires the market to continue an aggressive down move and for you to properly time your sale of those puts in order to benefit from them. By rolling the butterflies back, we were able to protect against further down movement without the negative effects of buying puts.


Summary1
Summary 10 - 660 long puts and buy 10 - 740 long calls

  • When the price reversed violently to the upside, we chose to add vertical spreads rather than roll up the butterflies to control Vega risk because we did not want to take on the downside risk associated with rolling up the butterflies, again, considering the violent reversals and very large price fluctuations we were still experiencing at the time.

  • With the continued up move and timeframe to expiration, the verticals were no longer effective in correcting our risk with the butterflies in their current position so the butterflies had to be rolled up.

  • As we got closer to expiration, the price of rolling up the butterflies became too costly to stay within our risk parameters but something had to be done, so we rolled up the butterflies and reduced the butterfly/call ratio to control our Delta and Gamma trend instead of rolling up and adding calls.


Summary2
Summary 10 - 660 long puts and buy 10 - 740 long calls

  • Finally, as we took the trade into expiration week and the position became more sensitive to price movement, we utilized puts to help control our downside Greeks and Greek trends and to protect our account from an excessive loss. We can use puts more effectively now because, close to expiration, you can purchase puts to control your risk fairly inexpensively.

  • Notice how we didn’t just look at our Greeks to decide when and how to adjust our position, we also looked at the analyze graph to analyze our Greek trends and we also considered recent price movement, IV levels and DTE to decide the best move to deal with unacceptable risk without taking on excessive risk in the opposite direction.


Up next in part 3
Up Next in Part 3 10 - 660 long puts and buy 10 - 740 long calls

  • Review Trade Set Up

  • Review Trade Entry

  • Go though August 2011 market crash, Sept 2011 expiration


Locke in your success llc
Locke In Your Success, LLC 10 - 660 long puts and buy 10 - 740 long calls

  • John Locke

  • www.lockeinyoursuccess.com

  • [email protected]

  • Facebook: Locke in Your Success

  • Twitter: locke4success

  • 603-738-1795


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