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The RUT Bearish Butterfly

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Presentation on theme: "The RUT Bearish Butterfly"— Presentation transcript:

1 The RUT Bearish Butterfly
SMB TRAINING OPTIONS TRAINING PROGRAM

2 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 Smbtraining.com) and in person.  Through Smbtraining.com, 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 www.CBOE.com). All trading conducted by contributors on Virtual Trading Floor is done through T3 Trading Group, LLC 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).

3 Description The RUT bearish butterfly is a trading system that is designed to make as much money as possible with the smallest possible exposure to the market. It starts out with a small amount of capital as a bearishly positioned butterfly and the position size is increased if market rises. The trade typically has a greater range than a high probability Condor with a much higher profit potential. The trade sometimes has “bonus” months where you can make well past profit target.

4 Entry – 1/3 Position

5 2/3 Position

6 Fully Scaled In

7 The Bearish Butterfly:
Description The Bearish Butterfly: Works the best in volatile, choppy, down trending markets and does very well in sideways markets and choppy up trending markets. Is most risky to trade and can difficult to manage in smooth, strong up trending markets but it usually works. Normally has a range before max loss of up to 150 – 300+ points on the downside and up to 60 – 120 points to the upside depending on the timing of the moves. This range can be drastically reduced however in unfavorable market conditions ( IE. An abnormally low implied volatility environment), late in the trade or if a whipsaw occurs.

8 Description The trade starts out with 50 point +/- wings and starts approximately 56 days prior to expiration. The trade is entered negative Delta with the short strikes approximately 20 points below the current market price. The trade is scaled into as the price goes up, and follows the market while increasing position size.

9 Core Guidelines The initial “core guidelines” are a starting point for learning the trade and they work very well. Once you’ve mastered the core guidelines, you can take steps to get more out of the trade which will be discussed later in the course. Guidelines may seem complex at first but are really straight forward if learned one step at a time.

10 Core Guidelines RUT Butterfly position size - 10 contracts scaling to 30. All profit, loss, Delta and Theta numbers within these guidelines are based off of the above position size. If you are trading a different position size, you will need to adjust these numbers accordingly. Delta/Theta ratios are the same regardless of position size.

11 Planned Capital “Planned Capital” IS a fixed number that we use to base our risk management off of and is a reasonable representation of the maximum amount of capital we are likely to have in the trade during an average month. “Planned Capital” is NOT the maximum amount allowed in the trade. In low volatility months with large price moves, your capital may substantially exceed the planned amount. Trades with escalating capital cannot be properly managed with profits and losses based off of a percentage of a variable number because trades almost always have substantially more money in them when they win lose than they do when they win. We must use a planned, fixed number in order to properly manage the trade.

12 Raw Delta and Delta / Theta Ratio
Raw Delta – Is the position Delta number at any given time. Delta / Theta Ratio – Is the raw Delta divided by the Theta number at any given time over 1. It is expressed as x.x Delta/1 Theta.

13 Risk Management and Profit Targets
Planned Capital - $50,000 Minimum Capital Required in Account - $100,000 Profit Target - $15,000 Max Loss - $15,000 Win / Loss Expectancy – 10 / 2 or 83% All data in the course is based off of back testing results during the period from 11/25/05 thru 9/15/11 while strictly following the trade guidelines . All decisions, entries, exits and adjustments made at 3:30 PM EDT. The daily range is ignored, except where noted.

14 Trade Exits Exit 1 – ($15,000) profit target hit
Exit 2 – ($5,000) 33% profit target is hit 21 DTE or closer Exit 3 – Friday before expiration Exit 4 – Maximum loss number ($15,000) is exceeded at 3:30 PM EDT. Exit 5 – When you are near the center of expiration graph the week before expiration, use your common sense. If you are in a “high risk position”, especially if you are not able to closely monitor the market, just exit the trade and move on to the next month.

15 Trade Entry The trade is entered in thirds with the first 1/3 being entered 56 days prior to expiration. Entry first 1/3: Buy 10 put butterflies OR sell iron butterflies with 50 point wings points below RUT price. We will use put butterflies. Entry first 1/3 modification: If Delta / Theta ratio is greater than 1.5 / 1, enter the market 10 points closer to the RUT price than normal.

16 Check Delta/Theta Ratio to be sure its absolute value is under 1
Check Delta/Theta Ratio to be sure its absolute value is under 1.5/ /91.35 over 1 = -0.92/1 Delta/Theta so the entry is OK.

17 Graph on Entry

18 Reference or Control Point
Once the position is entered, we will use the short or center strikes of the entry butterflies as an initial reference point to determine when we can take certain actions during the trade. If at any point during the trade we have butterflies with the short strikes at a lower value than the entry butterflies, the reference point will be moved to the lower strikes. The reference or control point is always the short or center strikes lowest butterflies that were entered at any time during the trade.

19 In this case the initial reference point is 460
In this case the initial reference point is 460. If this butterfly is rolled down, the reference point will be lowered but the it will never be raised.

20 Scale in Strategy The “basic” scale in strategy from here is to add when the market exceeds 40 points over the reference point and then again when the market exceeds 60 points over the reference point. From there, if the market exceeds 70 points past the reference point, you may begin your rolling sequence depending on specific conditions. For the purposes of this program, the reference point is the short strikes of the lowest positioned butterfly that was present at any time during the duration of the trade.

21 Price points that must be exceed in order to take the listed action
Strictly from a point basis, this trade is scaled into or adjusted to the upside as follows: Reference point +40 – add second 1/3 Reference point +60 – add last 1/3 Reference point + 70 – roll lowest butterfly +60 Reference point + 80 – roll lowest butterfly +60 Reference point + 90 – roll lowest butterfly +60 Reference point roll lowest butterfly +60 Reference point roll lowest butterfly +60 Reference point roll lowest butterfly +60

22 Entry and Adjustment Points

23 Record Your Reference Point
Once you choose your entry short strikes, make note of those strikes as your reference point and record the price points where you are allowed to enter your second and last thirds of the trade as well as your first roll point. For example, if you enter the first 1/3 the trade with 460 short strikes, your 2/3 would be entered when RUT exceeds 500 and your 3/3 would be entered would be entered when RUT exceeds 520 and your rolls would start when RUT exceeds 530.

24 In This Example, if the market does not exceed 500, the second third of the position will not be entered except under three conditions: A large enough down move occurs that the initial butterfly was repositioned at a lower strike in which case, you would look at the short strike of your lowest butterfly and reset the reference point. In rare cases, discussed later, where the market implied volatility is exceptionally low or you are very close to expiration and the 2/3 is “needed” in order to “safely” deal with the range. You are trading the variation of the plan that allows adding to the position on a down side move. This “core” version of the plan does not allow you to add to the position due to a down move except under rare circumstances described above.

25 Entry - The Second Third
When RUT price rises to 40 points above the reference point, add 1 put or iron butterfly 50 point wings 20 points over the existing butterfly.

26 Entry of Second 1/3

27 Entry - The Last Third When RUT price rises to 60 points above the reference point, add 1 put or iron butterfly 50 point wings 20 points over the highest butterfly.

28 Entry of Final Third

29 Delta and Theta Adjustments
Maximum Delta with 1/3 position is 250 Maximum Delta with 2/3 position is 500 Maximum Delta with 3/3 position is 750 Maximum Delta/Theta Ratio is 1.5/1 When these values are exceeded, the position will be adjusted assuming specific price point criteria are met

30 Position Management Upside When Position Consists of 1/3
RUT price is less than 40 points over the reference point. Roll the butterfly 20 points up: If Delta exceeds -250… AND… price is more than 20 points above the short strikes of the butterflies. If Delta / Theta ratio is greater than 1.5/1 … AND… price is more than 20 points above the short strikes of the butterflies.

31 Position has exceeded maximum Delta/Theta Ratio and is higher than 20 points from the short strikes and is below 40 points over the reference point. The position needs to be rolled up 20 points.

32 Graph Before Adjustment

33 Move the 460 Butterflies to 480 Theta/Delta ratio is corrected

34 Graph After Adjustment

35 Position Management Downside When Position Consists of 1/3
Roll the butterfly back to the closest ATM strike: If RUT price exceeds 40 points below the short strike. If Delta/Theta ratio is greater than 1.5/1 ..AND.. price is outside the expiration break even at the point where the break even crosses the T+0 line. If Delta exceeds 250 …AND.. price is outside the expiration break even at the point where the break even crosses the T+0 line. Remember to reset your reference point!

36 RUT price exceeded 40 points below the short strike
RUT price exceeded 40 points below the short strike. The trade needs to be adjusted.

37 Graph Before Adjustment

38 Butterflies are rolled back to ATM

39 Graph After Adjustment

40 Position Management Upside When Position Consists of 2/3
RUT price is less than 60 points over the reference point. Roll the lowest butterfly 40 points up: If Delta exceeds AND… price is more than 10 points past the short strike of the upper butterflies but less than 60 points from the reference point. If Delta Theta ratio is greater than 1.5/1 ..AND... price is more than 10 points past the short strike of the upper butterflies but less than 60 points from the reference point.

41 Delta Theta ratio is greater than 1. 5/1. AND
Delta Theta ratio is greater than 1.5/1 ..AND... price is more than 10 points past the short strike of the upper butterflies but less than 60 points from the reference point

42 Graph Before Adjustment

43 Original butterflies were rolled up 40 points

44 Graph After Adjustment

45 Position Management Downside When Position Consists of 2/3
Remove higher strike butterfly and trade with 1/3 position: If Delta exceeds 500. If Delta / Theta ratio is greater than 1.5/1. If price is outside the expiration break even at the point where the break even crosses the T+0 line.

46 Delta/Theta ratio is greater than 1.5/1

47 Graph Before Adjustment

48 The upper butterflies were removed Delta/Theta ratio is now corrected

49 Graph After Adjustment

50 Position Management Upside When Position is Fully Entered
From here you may adjust to the upside because of three reasons: If maximum Delta is exceeded. If Delta/Theta ratio is exceeded. If the roll point values from the reference point are hit.

51 Position Management Upside When Position is Fully Entered
Adjusting due to Delta numbers being exceeded: Roll lowest butterfly forward 60 points IF: Delta exceeds -750… AND… price is past the short strike of the upper butterflies. Delta Theta ratio is greater than 1.5/1 ..AND.. price is past the short strike of the upper butterflies. Remove the lowest positioned butterflies and wait till price exceeds the short strike of upper butterflies to complete the roll IF: If the above maximum Delta or Delta/Theta ratio is exceeded and the price is NOT past the short strike of the upper butterflies.

52 Position Management Upside When Position is Fully Entered
Adjusting due the point values from the reference point being hit: Use the chart below: Reference point + 70 – roll lowest butterfly +60 Reference point + 80 – roll lowest butterfly +60 Reference point + 90 – roll lowest butterfly +60 Reference point roll lowest butterfly +60 Reference point roll lowest butterfly +60 Reference point roll lowest butterfly +60

53 Position Management Upside When Position is Fully Entered
If you adjust the position for either reason, before making the adjustment, check to see if: The position Delta will be under after the roll. If Delta / Theta ratio is still greater than 1.5 / 1 or -750 Delta after the roll. If you removed the lowest butterflies, check to see if the remaining position is greater than 1.5 / 1 or -500 Delta.

54 Position Management Upside When Position is Fully Entered
If the position will be under –100 Delta after the roll. Remove the lowest butterfly instead of rolling and recheck your Delta/Theta ratio to see if the remaining position is greater than 1.5/1 or -500 Delta. If, the remaining position is greater than 1.5/1 or Delta, check if you can roll the lowest butterflies up 40 points without going under -100 Delta/Theta ratio, if not, look at removing the “new” lowest butterflies instead of rolling.

55 Position Management Upside When Position is Fully Entered
If Delta / Theta ratio is still greater than 1.5 / 1 or Delta after the roll. Perform a double roll and move the butterfly up 60 points from its position as well and check to see if you have gone under (-) 100 Delta. If so, remove the “new” lowest butterflies and recheck your Delta and Delta/Theta ratio.

56 Position Management Downside When Position is Fully Entered
Remove the highest butterfly and trade with two thirds of the position: If Delta exceeds +750. If the Delta Theta ratio is greater than 1.5/1. If the price is below the short strikes of the lowest butterflies… AND... Delta/Theta ratio is higher than 0.75/1. If the price is $20 below the short strikes of the lowest butterflies, remove the highest price butterfly regardless of the Delta / Theta ratio.


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