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Butterfly Trading Strategies part 3 of 3, 2/4/12

John Locke Locke in Your Success, LLC.


Know what you want, make it happen!

I teach traders how to improve their trading and become more profitable! www.lockeinyoursuccess.com
2012 Locke in Your Success, LLC.

Part 2 Bearish Butterfly


The RUT bearish butterfly is a high probability, low maintenance trading system that automatically adapts to market conditions and is designed to make as much money as possible with the smallest possible exposure to the market.

2012 Locke in Your Success, LLC.

A multi-butterfly position that is entered in thirds and is started as a bearishly positioned butterfly and then the position is scaled into as the market rises

2012 Locke in Your Success, LLC.

If the RUT rises more than 20 points from the entry price, add to the position

2012 Locke in Your Success, LLC.

IF RUT continues to rise to more than 40 points over the entry price, add to the position

2012 Locke in Your Success, LLC.

If RUT continues to rise?

The position follows the market with a rolling sequence based off of a reference point that is determined at trade entry. By following the rolling sequence the position will gradually overtake the rising price if the market continues to rise.
2012 Locke in Your Success, LLC.

This works extremely well a majority of the time

Down markets
Sideways markets Choppy, volatile markets Normally rising markets
2012 Locke in Your Success, LLC.

What about extreme up markets and grinding up markets?


The system automatically adapts to low volatility and grinding up market conditions by modifying add and roll points based on

Total position Delta compared to position size Delta/Theta Ratios


2012 Locke in Your Success, LLC.

Lets get into the trade!

Approximately 56 DTE, enter a butterfly position in RUT with the short strikes approximately 20 points below the current price.
Set your reference point at short strikes of the entry butterfly.

Record add and roll points which are based off of the reference point as follows.
Reference Reference Reference Reference Reference point point point point point +40 add second 1/3 +60 add last 1/3 + 70 roll lowest butterfly +60 + 80 roll lowest butterfly +60 + 90 roll lowest butterfly +60
2012 Locke in Your Success, LLC.

Risk Management and Profit Targets

Trade will start with 10 contracts (butterflies) and scale to 30 contracts if fully scaled into. Planned Capital - $50,000

Minimum Capital Suggested in Account - $100,000


Profit Target - $15,000 Reduced Profit Target - $5,000 21 DTE or closer Max Loss - $15,000
2012 Locke in Your Success, LLC.

May 2011 Expiration


March 25, 2011 56 DTE RUT = 826

Enter 10 put butterflies with short strikes at 810


2012 Locke in Your Success, LLC.

Reference point = 810 Add second third at RUT > 850 Add last third at RUT > 870 First roll point at RUT > 880

2012 Locke in Your Success, LLC.

Delta and Delta/Theta Ratio Guidelines

Most of the time the trade can be managed strictly by the price points, BUT, under certain conditions such as when IV is low or the trade is close to expiration or options prices are being overly skewed for any reason, the price point adjustments need to be modified to deal with those conditions.
To indentify and adapt to these conditions we will monitor the Delta and Delta/Theta Ratio of the position. Override the normal adjustments to deal with those circumstances when the predetermined values are hit. The predetermined values vary depending on position size and what stage of the trade you are in.
2012 Locke in Your Success, LLC.

For THIS position size, in THIS stage ONLY: Max Delta is +/- 250 Max Delta/Theta ratio is +/- 1.5/1

2012 Locke in Your Success, LLC.

We do nothing till: RUT = 770 or RUT =850 Delta > +/- 250 Delta/Theta Ratio > +/- 1.5/1

2012 Locke in Your Success, LLC.

6 days later, March 31 RUT is not past add point of 850 but Delta/Theta ratio is exceeded which should not happen. The options prices are being skewed. Since we did not exceed the add point, we do not add. Instead, to compensate for the skew, we roll the existing position up 20 points.

2012 Locke in Your Success, LLC.

New Delta/Theta is 1/1 Add point remains 850

2012 Locke in Your Success, LLC.

New Position

2012 Locke in Your Success, LLC.

April 5 RUT has Exceeded 850

2012 Locke in Your Success, LLC.

Before Adjustment

2012 Locke in Your Success, LLC.

Add the second third to the position Because we did a forced roll due to Delta previously, the position has adapted to the conditions and the new butterflies are put on ATM

2012 Locke in Your Success, LLC.

New Position Next Add Point is RUT = 870 New Max Delta is +/- 500 Max Delta/Theta Ratio remains +/- 1.5/1

2012 Locke in Your Success, LLC.

April 25, 25 DTE, profit target is exceeded Never had to deploy full capital to the position $16,200 from $29,100 investment in 31 days with unfavorable IV levels

2012 Locke in Your Success, LLC.

Pros

Usually easy trade to manage


Allows for wide range of price movement High returns with the potential for very big returns when market behaves

Can trade with different instruments (RUT, SPX, NDX)


2012 Locke in Your Success, LLC.

Cons

Profit and loss fluctuates a lot


Losses can be fairly large

High Delta
Grinding up months can be frustrating

Profit target relies somewhat on RUT settling, or pulling back

2012 Locke in Your Success, LLC.

Dec 2011 Expiration


Oct 21, 2011 56 DTE RUT = 707

Enter 10 put butterflies with short strikes at 690


2012 Locke in Your Success, LLC.

Reference point = 690 Add second third at RUT > 730 Add last third at RUT > 750 First roll point at RUT > 760

2012 Locke in Your Success, LLC.

We do nothing till: RUT = 650 or RUT =730 Delta > +/- 250 Delta/Theta Ratio > +/- 1.5/1

2012 Locke in Your Success, LLC.

Next trading day RUT exceeds 730

2012 Locke in Your Success, LLC.

New position Next add point RUT > 750

2012 Locke in Your Success, LLC.

Oct 27, 3 more days, RUT = 768, up over 60 points from entry, not only exceeding add point, but also exceeding first roll point

2012 Locke in Your Success, LLC.

AHHHH!

2012 Locke in Your Success, LLC.

Add in the last 1/3 of the trade Roll lowest butterflies up 60 points

2012 Locke in Your Success, LLC.

New Position

2012 Locke in Your Success, LLC.

6 days later RUT pulls back to 719

2012 Locke in Your Success, LLC.

Position looks nice

2012 Locke in Your Success, LLC.

Nov 9, 37 DTE

2012 Locke in Your Success, LLC.

Nov 21, 25 DTE Profit Target is Exceeded

2012 Locke in Your Success, LLC.

Graph

2012 Locke in Your Success, LLC.

Part 3 M21 Trade System

Combines the scaling in advantages of the Bearish Butterfly (M9) with the loss control techniques of the M3 and proper trade planning to produce a high probability, high return trading system.
Twice the monthly return of the M3 2/3 the monthly return of the bearish butterfly but may outperform the Bearish Butterfly on a yearly level in certain market environments Better win rate than the Bearish Butterfly and the M3
2012 Locke in Your Success, LLC.

M21 Trade System

In order to trade the M21, you must fully understand all the concepts of both the M3 trade AND the M9 (Bearish Butterfly). Otherwise you will not be able to properly manage the trade!
2012 Locke in Your Success, LLC.

Starts out like an M3

2012 Locke in Your Success, LLC.

Go in with full number of butterflies

2012 Locke in Your Success, LLC.

Then use a reference points and roll points to adjust out the position in thirds like the Bearish Butterfly

2012 Locke in Your Success, LLC.

1/3 adjusted out

2012 Locke in Your Success, LLC.

Butterflies get spread out and rolled forward and back with price movement

2012 Locke in Your Success, LLC.

2/3 adjusted out

2012 Locke in Your Success, LLC.

Uses a combination of Greeks and Greek Trends to determine adjustments

2012 Locke in Your Success, LLC.

And uses Delta control techniques of M3

2012 Locke in Your Success, LLC.

OV Examples

Sept 2010 Exp. : down, then up Jan 2012 Exp. : up and up


Bearish butterfly had big draw downs both these months
2012 Locke in Your Success, LLC.

Risk Management and Profit Targets

Trade Size: 30 butterflies to 3 RUT calls B/C Ratio: 1/1 ratio=PC 50,000 per call Planned Capital - $150,000 Profit Target - $30,000 Reduce Profit Target - if B/C ratio is altered Example 0.66/1 = profit target 0.33/1 = profit target Max Loss - $30,000
2012 Locke in Your Success, LLC.

Locke In Your Success, LLC

John Locke www.lockeinyoursuccess.com john@lockeinyoursuccess.com Facebook: Locke in Your Success Twitter: locke4success 603-738-1795
2012 Locke in Your Success, LLC.

Just Released !!!

Ive teamed up with SMB Training, a premier Options Training Firm based in NYC, and produced a comprehensive training program that teaches the Bearish Butterfly Trading System.
Check out the links below for more on the Bearish Butterfly:

Purchase the Bearish Butterfly Training System here: https://www.smbtraining.com/cart/checkout

2012 Locke in Your Success, LLC.

Important Links

My website: www.lockeinyoursuccess.com
My interview with Tim Bourquin of Traderinterviews.com: http://www.traderinterviews.com/pro/2012-02-16_JohnLockeButterflyOptions.php Direct link to the Bearish Butterfly Training Program, the first step in your success to trading butterflies: https://www.smbtraining.com/product/bearish-butterfly-options-strategy One of my students with the M3: https://smbcap.webex.com/ec0605ld/eventcenter/enroll/register.do?siteurl=s mbcap&formId=4688957&confId=4688957&formType=1&loadFlag=1&event Type=1&accessType=viewRecording
2012 Locke in Your Success, LLC.

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2012 Locke in Your Success, LLC.

Programs Currently in Development

The M3 Trade System


The M21 Trade System Technical Analysis Using T/A to Adapt Income Trades Proper Trade Planning and Risk Management Executing Live Complex Options Spreads

2012 Locke in Your Success, LLC.