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

John Locke Locke in Your Success, LLC.

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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.

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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

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

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

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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.
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This works extremely well a majority of the time

Down markets
Sideways markets Choppy, volatile markets Normally rising markets
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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

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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
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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
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May 2011 Expiration

March 25, 2011 56 DTE RUT = 826

Enter 10 put butterflies with short strikes at 810

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

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

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

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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.

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

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New Position

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April 5 RUT has Exceeded 850

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Before Adjustment

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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

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

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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)

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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

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Dec 2011 Expiration

Oct 21, 2011 56 DTE RUT = 707

Enter 10 put butterflies with short strikes at 690

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

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

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Next trading day RUT exceeds 730

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New position Next add point RUT > 750

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

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AHHHH!

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

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New Position

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6 days later RUT pulls back to 719

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Position looks nice

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Nov 9, 37 DTE

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Nov 21, 25 DTE Profit Target is Exceeded

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Graph

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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!
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Starts out like an M3

2012 Locke in Your Success, LLC.

Go in with full number of butterflies

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

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1/3 adjusted out

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

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2/3 adjusted out

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Uses a combination of Greeks and Greek Trends to determine adjustments

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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
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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
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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

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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
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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

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