Presentation Transcript

1. SMB TRAINING OPTIONS TRAINING PROGRAM Presents:
2. The M3 Trading SystemPart 3 August 2011 Market Crash September 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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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. September 2011Risk Management and Profit Targets Trade Size: 1 RUT or 10 IWM Calls Butterfly Call Ratio: 10 Butterflies to 1 RUT Call (1/1 ratio) Planned Capital - $50,000 Profit Target - $5,000 Max Loss - $5,000 Reduce Profit Target – in event B/C ratio is altered
6. In this example…. We are going to sell put verticals rather than buy call verticals to adjust the position. The moves are synthetically the same but have different margin requirements.
7. Entry Position Price ChartSeptember Expiration 2011
8. Entry PositionSeptember 2011Expiration
9. Entry Position for September 2011Expiration on July 22
10. 5 Days Later – July 27, 2011
11. July 27, 2011
12. July 27, 2011
13. Down side risk could be corrected by selling the call
14. Down side risk could be corrected buy buying a put
15. A safer, higher probability approach would be to roll back the butterflies
16. Buy 780 butterflies Sell 820 butterflies
17. New PositionUpside still looks great!
18. 6 Days LaterAugust 2 – 45 DTE
19. August 2 – 45 DTE
20. We have the same conditions as before but this time the market is at support and “likely?” to hold.Do we want to hold this position?
21. NO! We never want to take on excessive risk just because the market is at a support or resistance level! Major support or resistance levels are where the most violent and unpredictable moves commonly occur. Having too much risk under these conditions is likely to force an adjustment to, or exit of, the position in very unfavorable conditions. Trading in unfavorable conditions creates situations where we are likely to get in trouble and take greater than expected losses. We want to avoid putting ourselves in situations that may force us to trade in unfavorable conditions.
22. Buy 750 ButterfliesSell 780 Butterflies
23. We have corrected downside risk and taken money out of the trade
24. 2 Days LaterAugust 4 – 43 DTE
25. Again Greeks are fine but we have other things to consider
26. We are pushing the downside AGAIN!
27. Buy 710 ButterfliesSell 750 Butterflies
28. This looks fine but…..If we want to do a minor adjustment to help with a sudden reversal we can roll back our long call to a higher Delta
29. Sell 750 CallBuy 700 Call
30. New Position
31. 4 Days LaterAugust 8 – 39 DTE
32. This day was the largest single day move in the history of RUT (almost 64 points!)
33. Here we go again!
34. Buy 650 Butterflies - Sell 710 ButterfliesSell 700 Call - Buy 660 Call
35. New PositionWe can literally take RUT to 0 doing this…Assuming we are far enough from expiration
36. After a hard sell off… You always get a hard bounce!
37. 7 Days Later August 15 - 32 DTE
38. Positive Vega is a “hidden risk”
39. Adding a vertical spread puts the Greeks within range but we must verify with the analyze graph
40. Taking the current market environment into consideration, I would consider this a little too much downside risk.
41. Let’s try rolling up some of the butterflies
42. This is much better
43. 7 Days LaterAugust 22 – 25 DTE
44. Position Greeks look great!
45. Analyze graph looks goodWe do nothing
46. 7 Days Later August 29 – 18 DTE
47. Vega has gone positive
48. T+0 “looks” ok but….
49. Buy 5 650 putsSell 5 670 puts
50. New Position
51. Next DayAugust 30 – 17 DTE
52. Once again we are concerned with Vega risk
53. Buy 5 670 butterfliesSell 5 650 butterflies
54. New Position
55. 8 Days LaterSeptember 7 – 9 DTE
56. Because we are getting very close to expiration, the position is becoming increasingly sensitive to price movement
57. We are also at a point where we run into Vega and Theta problems closer and closer to the tent.
58. Buy 10 670 putsSell 10 680 puts
59. New Position
60. 2 Days LaterSeptember 9 – 7 DTE
61. The market is really swinging around and more frequent adjustments are needed this close to expiration, under these conditions, we should seriously consider exiting the trade.
62. A very hard down move with an IV increase would be a big problem
63. Buy 10 650 ButterfliesSell 10 670 Butterflies
64. This is much better, but if you are still concerned…..
65. Buy 10 560 Puts
66. Now the overnight/weekend risk of taking a much larger than planned loss is very remote Corrects Gamma trend and acts as a volatility hedge
67. 3 Days LaterSeptember 12 – 4 DTE
68. Profit target is exceeded and trade should be closed since it is 4 DTE but I will bring you into expiration
69. Position looks great
70. Next Day – up 18 points September 13 - 3 DTE
71. Delta is way too highGamma does not trend positive fast enough
72. Buy 5 680 PutsSell 5 700 Puts(To Remove Upside Risk)
73. New Position
74. Next DaySeptember 14 – 2 DTE
75. Large up move puts position negative Theta and positive Vega
76. Even though things went against us, we are still OK
77. If we want to stay in the position, we need to take on a little more risk but not much
78. A little fine tuning
79. Probably the best low risk non-directional position we can create at this point
80. Last day of trading!
81. Do we want to expire the position?
82. What a crazy ride!
83. This example went through… Shift from a low volatility to an extreme high volatility environment Nearly 200 point drop in 11 days Followed by a choppy range of over 80 points Position was checked only 1 time per day Position was never down a significant amount of money Never took excessive risk in either direction This win did not hinge on exact timing of adjustments nor speculating on a market direction!
84. Summary We entered this trade in a relatively low volatility environment. The market went into dramatic sell off which created a large volatility increase in the beginning of the trade. We kept choosing to roll our butterflies back rather than removing calls or adding puts because removing calls would create excessive upside Gamma trend risk and adding puts would likely create losses if the market did anything except continue to sell off aggressively. We discussed how adding puts would have been a better choice than removing calls. You should be aware however that using puts may have required timing the market somewhat to avoid a loss. When the market finally bottomed and the price reversed violently to the upside, as is to be expected after an aggressive sell off, we chose to roll up ½ of the butterflies to control Vega risk rather than to add vertical spreads as adding verticals did not produce the result we wanted with the t+0 line.
85. Summary Later on with the continued up move, we rolled the remainder of the position and then were able to utilize verticals to control Vega risk. The market then sold off once again and we rolled back the butterflies to control downside risk. Finally as we took the trade into expiration week and the position became more sensitive to price movement, we utilized puts to help protect our account from an excessive loss because, close to expiration, you can purchase puts to control your risk fairly inexpensively. The price reversed on us once again and we bought an OTM put spread to remove upside risk and protect profits should a continued up move occur.
86. Summary Finally we sold off our call 2 DTE and repositioned the puts to raise our expiration graph near the current price of RUT and create a low risk way to make more profit should the market cooperate. 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.
87. Up Next in Part 4 Review Trade Set Up Review Trade Entry Go though August 2011 expiration
88. Locke In Your Success, LLC John Locke www.lockeinyoursuccess.com john@lockeinyoursuccess.com Facebook: Locke in Your Success Twitter: locke4success 603-738-1795