1. Butterfly Trading Strategies part 1 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!
© 2012 Locke in Your Success, LLC.

2. © 2012 Locke in Your Success, LLC.
Disclaimer
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.
* 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, available at
© 2012 Locke in Your Success, LLC.

3. The “High Probability Iron Condor”
Risk $9000 to make $900….YUCK!
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4. The “Low Probability Iron Condor”
Risk $7300 to make $2700……Better
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5. The “Very Low Prob Condor” or the “Butterfly”
Risk $1500 to make $3600…. Yes!!
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Butterfly Challenge
Risk reward is great 
Range stinks 
How do I take a butterfly which has a great risk/reward ratio and give it the same range as the “high probability iron condor”?
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The Answer
Method 3 Butterfly late 2007 (M3)
Method 9 Butterfly early 2008 (Bearish Butterfly)
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Since then….
The M3 and Bearish Butterfly have been traded through some of the most volatile markets in history!
08 crash, 10 flash crash, 11 crash in Aug
Record rallies in 09, 10
Made improvements along the way
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9. © 2012 Locke in Your Success, LLC.
M3 Trade System
The M3 is a trade that has evolved into a system that I now use as a learning tool.
The M3 allows traders to learn “proper” position analysis, position control and decision making processes while trading a live position, experiencing live execution and maintaining relative safety in the market place.
The M3 is designed to minimize risk or “not lose money”.
It is not designed to create large monthly profits.
© 2012 Locke in Your Success, LLC.

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M3 Trade System
The M3 can be used as a stand alone trade system.
As a stand alone system the M3 has historically produced an average of around 3-5% per month for most of my students. However past performance can not predict future results.
I still trade the M3!
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Advantages of the M3
No searching for stocks.
No need to pick direction.
Can be entered regardless of market conditions
Most adjustments are not urgent
No need to sit in front of the computer all day
Can be in the market, making money from anywhere in the world, in any time zone, even while on vacation.
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12. I can trade while I’m skiing.
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13. I can trade while I’m at the lake.
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14. I can trade when I’m jumping off buildings in Las Vegas.
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15. I typically check this trade once a day
Most of the time I don’t need to do anything.
The times that I do need to do something, I can usually put it off.
Only in rare cases would I NEED to jump in and do something right away.
© 2012 Locke in Your Success, LLC.

16. M3 does not have “hard” guidelines
Trading from a rule sheet does not teach you to become a great trader.
Knowing the concepts of trading as well as how, why and when to apply those concepts is teaches you to trade.
The M3 uses concepts instead of a rule sheet.
© 2012 Locke in Your Success, LLC.

17. Underlying Concept of M3
Maintain positive Theta, relatively flat Delta, low Gamma and negative Vega.
More important than the current Greeks are the Greek trends (what going to happen to the Greeks at any given price point on the analyze graph, as time goes by)
Use a stock, or stock substitute, with a bearishly positioned options spread (butterfly) position.
Assess risk daily by analyzing, the Greeks and the Greek Trends and then adjust the position if needed.
© 2012 Locke in Your Success, LLC.

18. Typical Entry Position
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19. Typical Entry Position
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Object
The object of the game is to keep the proper balance between the butterfly and the stock or stock substitute while maintaining positive Theta, neutral Delta, low gamma and negative Vega but most important I want to maintain favorable Greek Trends in my area of concern
© 2012 Locke in Your Success, LLC.

21. Preferred Positioning
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22. Underlying for examples is RUT
RUT put butterflies with 50 point wings
Butterflies are hedged with either RUT calls, IWM calls or IWM stock. We will use RUT calls.
The ratio of the butterflies to stock will vary with butterfly pricing (or implied volatility)
M3 can be used with other indices and some stocks but wing width and ratios may vary
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Entry Guidelines
Entry: Approximately 56 DTE
Butterfly Positioning: Short strikes 20 – 30 points below underlying
Longs: Purchase sufficient number of deep ITM long options (or stock) so the opening position is either flat Delta or leaning slightly in the direction of your market opinion
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Planned Capital
“Planned Capital” IS a fixed number that we use to base our risk management numbers 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.
Trades with varying capital cannot be properly managed with profits and losses based off of a percentage of “whatever is in the trade” because these trades almost always have substantially more money in them when they win lose than they do when they win.
“Planned Capital” IS NOT the maximum amount allowed in the trade.
In low volatility months with large price moves or if trading into expiration, your capital may substantially exceed the planned amount.
© 2012 Locke in Your Success, LLC.

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Risk Management
Planned Capital: $5,000 - $ 8750 per IWM call depending on butterfly/call ratio which will vary with market conditions and underlying/s you are using
Target Profit: +10% of planned capital
Max Loss: -10% of planned capital
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Adjustments
We are going to use a combination of techniques including verticals, varying butterfly to call ratios and moving the butterflies to maintain desirable Greeks and Greek trends while maintaining a reasonable amount of capital in the trade.
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Desired Greeks
Desired Greeks will vary depending on position size, the trend of the Greek we are looking at and the direction of movement we are concerned about.
Greek management is based off of position size.
Position size is determined from how many IWM calls the position has. (1 RUT call = 10 IWM calls)
For today position size will be 1 RUT call (10 IWM calls)
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“In General” The desired Greeks for the position size of 1 RUT call are…
Delta: Ideally +/- 50
Acceptable +50 to (-)100
Delta may exceed this range with favorable Gamma trend
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In General
Gamma: (+) is good / (-) is bad
Unfortunately negative Gamma is a byproduct of Theta (unless we are naked options which we are not)
The total Gamma number, however, is not as important as the trend of Gamma. As long as Delta is under control and Gamma is trending positive in the direction of concern at a favorable rate, there is no problem. Gamma trend can be observed with the analyze graph.
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Theta and Vega
Theta: Positive!!! More is better!!!
BUT, more Theta is better ONLY if Gamma and Gamma trend are under control. There are times it is favorable to reduce Theta to mitigate Gamma risk.
Vega: This trade should maintain negative Vega…How much?
When IV is high, especially under conditions when the price is likely to stabilize, then we want more negative Vega
When IV is low especially when the price is very over bought, we want “less negative” Vega
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