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  2. 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!”

  3. 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 and in person.  Through, 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 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.

  4. 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.

  5. 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

  6. Entry Position Price ChartOctober Expiration 2011 We’ve had the crash and are entering into extremely volatile market conditions

  7. Entry PositionOctober 2011Expiration

  8. Entry Position for October 2011Expiration on Aug 26

  9. Talk About Bad Timing!

  10. We Do Nothing

  11. Next Day, August 30RUT is up another $12

  12. Implied Volatility will fall “IF” price stabilizes

  13. 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

  14. Buy a call vertical to reduce Vega exposure

  15. New Position

  16. Price Chart

  17. 15 Days LaterSeptember 14 – 37 DTE

  18. Analyze Graph

  19. 8 Days LaterSeptember 22 – 29 DTE

  20. September 22Matrix

  21. Analyze Graph

  22. 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

  23. Roll butterflies back

  24. Position After Adjustment

  25. 11 Days LaterOctober 3 – 18 DTE

  26. This is serious!

  27. October 3 – 18 DTE

  28. Analyze Graph

  29. What would you do? • Add puts • Remove calls • Remove bullish verticals or add bearish verticals • Nothing

  30. 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.

  31. 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.

  32. 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.

  33. 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.

  34. Roll the butterflies back 20 points

  35. Oops! Don’t forget about the call.

  36. Roll Back Call

  37. New Position

  38. 2 Days Later October 5 – 16 DTE

  39. Matrix

  40. Analyze Graph

  41. 2 Days LaterOctober 7 - 14 DTE RUT up 8 more points

  42. Analyze Graph

  43. 3 out of 4 isn't bad

  44. New Position

  45. Next trading day RUT is up 20 more points

  46. Analyze Graph11 DTE

  47. RUT has been all over the place

  48. 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

  49. To correct the Theta and Vega problem …

  50. I don’t want to stay here for too long but it works for now