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SMB TRAINING OPTIONS TRAINING PROGRAM Presents:. Disclaimer.
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SMB TRAINING OPTIONS TRAINING PROGRAM Presents:
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 • 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 commissions. 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.
The ROCK Trading SystemPart 1 Description ,Configurations and Entry Guidelines • 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!”
John Locke • President of Locke In Your Success, LLC • Options Trader • Success Coach • Options Trading Mentor
The ROCK!Purpose • The ROCK was specifically designed as a component of the M21 trading system both as a standalone “position” and as a means of gradually swapping back and forth between M3 and Bearish Butterfly configurations as market conditions dictate. • The system will be demonstrated here as a “stand alone” position and may be traded as a monthly, Market Neutral trading approach. • The system can also be very effective as a modification to both the Bearish Butterfly and M3 Trading Systems in specific market conditions such as “run away” up markets.
Caution • This trade requires incremental adjustability and must be traded with multiple contracts, therefore minimum suggested size is $50,000 Planned Capital if traded in RUT. If this does not fit in your comfort level, do not trade it live. • This trade can be practiced with IWM however there are some risks which include.. • A substantial amount of commissions which will negatively effect profit/loss. • Using an ETF such as IWM carries both dividend and assignment risks. • Prior to trading this system I STRONGLY RECOMMEND that you have traded and you fully understand both the M3 and Bearish Butterfly trade systems because, at times, this trade literally is an M3 or Bearish Butterfly and this program does not directly address the M3 or Bearish Butterfly guidelines. • All analysis and parameters are based off of OptionVue analysis software with the default settings as of this writing. Results may vary significantly if other analysis software is used or if incorrect settings are used.
It is assumed…… • That you have been through and fully understand both the M3 and Bearish Butterfly Trading Programs. If you have not, this may be very confusing, and likely, very costly for you to trade. It is STRONGLY recommended that you go back and learn those systems prior to attempting this system.
Negative Number Clarification • For the technical people out there, I am aware that a number such as -100 is actually greater than -200. However a majority of the people do not instinctively think in this manner therefore…. • For the purposes of this program and to avoid confusion for a majority of people, when we refer to a number as being greater than -200, we mean a number such as -300. And if we say we want a number less than -200 we mean a number such as -100.
Description • The Rock was originally designed as a part of the M21 Trading System as well as a supplement for the M3 and Bearish Butterfly systems. • The Rock, as presented here is a stand alone trading system, which takes advantage of relatively flat market conditions while being resilient enough to handle a substantial amount of price movement in either direction. • The guidelines use indicators that “modify” and morph the trade for the purpose of adapting to market conditions and pricing skews both at entry and for the duration of the trade. • The trade uses “loose guidelines” as in the M3
Description • Works best in flatter market conditions but will adapt to most situations. • Handles large trending moves fairly well in either direction. • Is most risky to trade in markets when IV is very low and the price movement is excessively choppy. • Easily transitions into a M3 or Bearish Butterfly • Makes an excellent adaptation to the M3 and/or Bearish Butterfly in market conditions that are not optimal for those trades. • Is an essential component of the upcoming M21 Trading System.
Description • Like the Bearish Butterfly the trade scales from a small number of contracts up to 30 contracts. • The trade is considered 1/3 entered with 10 contracts, 2/3 entered with 20 contracts and fully entered with 30 contracts. • Unlike the bearish butterfly the short strikes of the trade are not always 20 points apart and the trade is not always entered in 1/3’s but rather a few contracts at a time. You will often be somewhere “between” 1/3 and 3/3 scaled in, rather than “at”1/3, 2/3 or 3/3 scaled in.
Configurations • This trade will swap back and forth between multiple configurations. • Rock, Modified Rock, M3, M3R, Cat and Bearish Butterfly • Guidelines will vary depending on configurations. • The normal entry position is considered the “ROCK” configuration. • We will go over examples that cover all configurations.
Typical Entry – ROCK ConfigurationLooks like the “Prudential Rock™” This is what the ROCK looks like when approximately ½ entered
M3R Configuration(ROCK >1/3 entered to 2/3 entered with 2 roll backs)
Examples will be using RUT • For the demonstrations in this program, we will be using the Russell 2000 index with a planned capital of $50,000. This is the minimum recommended size for this trade. • We will be using both call and put butterflies (all butterflies will have 50 point wings). We will also use ITM calls, OTM calls, vertical spreads and individual options. • We start approximately 30 DTE by setting up 10 put butterflies that are more than 10 points but no more than 20 points below the price of the underlying. • We will then make a judgment about the market conditions based on the Delta and from there we will either perform a Normal ROCK entry, a Modified ROCK entry, an M3 entry or in extreme cases a Bearish Butterfly entry (not shown in this program)
Entry Types • Normal ROCK entry: • Enter the put butterflies and then add a certain number of call butterflies 40 points over our short strikes to bring Delta into a specified range. • Modified ROCK entry: • Enter the put butterflies and then add 10 OTM calls at approximately 5-10 Delta to cut our entry Delta back to specified range. • M3 and Bearish Butterfly entries: • Performed per their respective guidelines • CAT • CAT entry will be covered in the M21 program
Position Size for Examples • RUT Butterfly position size - $50,000 PC =10 contracts scaling up to as many as 30 contracts. • All profit, loss, Delta and Theta numbers within these guidelines are based off of a $50,000 PC position size. • If you are trading a different position size, you MUST ADJUST YOUR NUMBERS ACCORDINGLY. • Delta/Theta ratios are ratios and remain the same regardless of position size.
Planned Capital • Planned Capital “IS”a fixed number that we use to base our risk management numbers off of which 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. • This position WILL sometimes significantly exceed Planned Capital. • We need a planned number because…Trades with varying capital cannot be properly managed with profits and losses based off of a percentage of “whatever is in the trade” because these trades almost always have substantially more money in them when they lose than they do when they win. • Using planned capital, your profit targets and maximum loss numbers will be predetermined or “fixed” DOLLAR amounts. • Planned capital may never reached or it may be exceeded, either way our profit targets and loss numbers remain the same.
Risk Management and Profit Targets • Planned Capital - $50,000 • Minimum Capital Recommended in Account – 200% PC - $100,000 • Profit Target – 20% PC - $10,000 • Max Loss - 20% PC - $10,000 • Notes: • All data in the course is based off of back test results during the period from 11/25/05 thru 12/30/12 while following the guidelines presented . All entries were made at 3:30 PM EDT. • A great majority of adjustments and exits were made at 3:30 PM EDT however the daily range is considered in this trade and therefore there may be multiple adjustments made intraday particularly near expiration.
Entry Guidelines • Entry: For the examples we will enter 30 DTE or closer if there is a holiday or if the previous trade is still open. (no overlap of months) • Butterfly Positioning: Put butterflies with the short strikes 10 – 20 points below underlying (on RUT) • We will model the put butterflies and check the Delta on the T+0 line 20 points above the short strike. • If Delta is greater than -200 (more negative than -200), we will use a normal entry. • If the Delta is less than -200 (less negative than -200), we use a high IV entry (Modified ROCK or M3). • If the numbers are “close” we will use the charts to decide.
Model 10 put butterflies 10 -20 points below the money (830) and check DeltaCurrently, we are showing -206 Delta at RUT 841 BUT…We want to know if our Delta at 20 points over our short strikes (at 850) is more than -200.
If we were less than -200 at RUT841, then we would want to check to see what our Delta would be “IF” the price was at RUT 850, 20 points over our short strikes (-281)
Guidelines for Normal Entry • If we have determined that we will do a normal entry and have entered the put butterflies…. • Add call butterflies with 50 point wings placing our short strikes 40 points over the short strikes of the existing put butterflies until our Delta at 20 points over the short strikes of the put butterflies is less than -200
In this case, we find that adding 5 870 call butterflies will bring the existing Delta to -59. Let’s check the Delta at RUT 850
If RUT was at 850, our Delta would be -180.6 which is acceptableThis would be considered “ROCK” configuration
High IV Entry • In higher IV environments we tend to get very large price swings. Under these conditions, trying to keep our trade high Theta usually results in excessive trade adjustments as well as unneeded losses. Therefore, it usually makes sense to adapt our position to create a flat T+0 line and not worry about being “under the tent”. • The ROCK uses the Delta of our put butterflies at a price point of 20 points over its short strikes as a guideline of when the market is too volatile for a normal entry and adapts by using a modified entry. • The position is then traded in a modified configuration until such a time the Delta indicates we would likely be better off in normal configuration.
Entry GuidelinesEntry Test • Entry: For the examples we will enter 30 DTE or closer if there is a holiday or if the previous trade is still open. (no overlap of months) • Butterfly Positioning: Short strikes 10 – 20 points below underlying (on RUT) • Check the Delta on the T+0 line 20 points above the short strike. • If Delta is greater than -200 (more negative than -200), we will use a normal entry. • If the Delta is less than -200 (less negative than -200), we use a high IV entry. • If the numbers are “close” use the M3 entry.
Model 10- 650 put butterflies and check DeltaWe want to know what our Delta is 20 points over our short strikes (at 670). Currently, we are showing -90 at RUT 663. Therefore we need to check the analyze graph to see if Delta is greater than -200 at RUT 670
Excessively flat Delta indicates the market is too volatile for a normal entry and we should use a high IV entry modification
High IV Entry GuidelinesOnce we have determined we will do a High IV entry…. • Model entering the 10 put butterflies and then add10 OTM calls with sufficient Delta to cut our position significantly Delta under -50 • Check to see if the calls we modeled are under 10 Delta • IF the calls are under 10 Delta, then proceed with Modified ROCK entry • IF the calls need to be more than 10 Delta to get our position Delta under -50, then perform an M3 entry using M3R guidelines for timing the trade conversion back into ROCK configuration. • IF you could go either way, check the chart to see if the market is experiencing excessive chop or it is trending. • If market is excessively choppy use Modified ROCK entry. • If market is trending, use the M3 entry
When we are expecting excessive volatility, we are using OTM calls to hedge the position to the upside • Advantages of OTM calls • If you get a fast aggressive up move, they can provide very good protection • If you get an aggressive down move, they do not hurt the position as much as an ITM call or vertical does • Disadvantages of OTM calls • If the prices sits, time goes by, you get only a moderate move in either direction or a substantial volatility drop then the calls WILL lose money and hurt the position. In fact, I would say you will lose money over 80% of the time on those calls • Your T+0 line is fictitious and will most likely collapse substantially to the upside when a move does occur • The only reason we are using OTM calls here is because conditions dictate that we may get an extreme move, even so, it will usually cost us. Therefore, we want to get rid of those calls as soon as conditions allow and switch back over to ROCK or M3 configuration.
High IV Entry Model butterfly position and then model buying 10 OTM calls that cut our Delta to under -50
M3 Entry • An M3 entry should be considered when the Delta of the put butterflies is closer to -200 or when IV is high and price movement is trending rather than in a wide range of chop
Summary • In this section we covered: • The 6 configurations of the trade • Normal Rock • Modified Rock • M3 • M3R • CAT • Bearish Butterfly • The 3 most common ROCK trade entries • Normal Rock • Modified Rock • M3 • How to use Delta numbers as an aid to determine which entry to use
