SMB TRAINING OPTIONS TRAINING PROGRAM Presents:
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!”
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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 ChartOctober Expiration 2011 We’ve had the crash and are entering into extremely volatile market conditions
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
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
What would you do? • Add puts • Remove calls • Remove bullish verticals or add bearish verticals • Nothing
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 • 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 • 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 • Roll the butterflies back. • Correct Delta and allows more downside room without the negative effect of hurting the position if the market reverses.
Situation • 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