Brought to you by Locke in Your Success, LLC. A World Leader in Options Education Created and taught by John Locke Know what you want, make it happen! 1
LOCKE IN YOUR SUCCESS, LLC is NOT a Broker Dealer. LOCKE IN YOUR SUCCESS, LLC Training engages in trader education and training. LOCKE IN YOUR SUCCESS, LLC offers a number of products and services, both electronic (over the internet through smbtraining.com) and in person. LOCKE IN YOUR SUCCESS, LLC also offers web-based, interactive training courses on demand. The seminars given by LOCKE IN YOUR SUCCESS, LLC 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 decision you make, and such decisions will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs. This material is being provided to you for educational purposes only. No information presented constitutes a recommendation by LOCKE IN YOUR SUCCESS, LLC 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. Such decisions should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance and liquidity needs. No relevant positions 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 commissions. 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. 2
The trade plans are specifically designed for the Russell 2000 index. Can be traded with other higher priced indexes such as the SPX with minor modifications. Can also be traded on many higher priced stocks over $500 assuming they have the proper strikes and options skews that allow the trade to work. HOWEVER, if you choose to do so, you must position size properly as equities sometimes have extremely large movements that may cause you to significantly exceed your maximum acceptable loss limits. 3
1. All options are in the same expiration cycle. As soon as we introduce options with different expiration cycle such as a back month options, the composite position Greeks are virtually useless! The position can still be analyzed but it is much more complicated and must be done in a multi-step process which is beyond the scope of this course. 2. We are using analytical software that takes into account what we call true Delta, Gamma as well as put call skews. The reason we need to take these into account is because if we do not, our T+0 line is often extremely inaccurate and unpredictable. The only software available on the market right now, as far as I know that does this is OptionVue. Note that even OptionVue needs to be set to take those skews into account. 4
The profile of the line and the Greeks along that profile Profile Gives us a general idea of what s going to happen to P/L with price movement Greeks along the profile Give us an idea of how that T+0 line will change when certain things happen Be aware of what market volatility, time and directional bias changes within the market generally do to the shape and location of the T+0 line Use the information to more accurately access our risk and make better trading decisions 5
6
7
8
Considering this we can trade more efficiently through Using fewer contracts for adjustments Having more adjustment options available to us Managing trade capital more effectively 9
Asset: RUT Planned Capital: $50,000 Max Loss: $5,000 Profit Target: $5,000 Maximum EOD + Delta +50 Optional Intraday + Delta of 100 (decide if you will use this in advance) Maximum EOD negative Delta inside tent -100 / At edge of tent -75 / Outside tent -50 10
Vega Negative Theta Positive All options in same expiration* so that we can properly analyze Greeks. (*with the exception of deep ITM calls that have virtually no Vega/Theta) The T+0 line shall be kept relatively flat and stable to the upside and allow for a minimum of 30 point drop to the downside before maximum loss is exceeded. (after any completed adjustment process) Notice that nowhere did I state anything about being in a butterfly nor a call **The principles above can be accomplished in multiple ways and I don t want my plan to box me in as to how I accomplish that 11
50 point wing butterflies and calls Condors and calls BWB with or without calls BWC with or without calls Randomly placed options with or without calls Calls with weekly options that have virtually no Greeks values other than Delta 12
We will use a regular M3 as a reference structure to help us understand how to manage the position and how it might react while not being confined by the structure Start similar to an M3, often get pushed away from M3 structure and then trade back toward M3 structure Periodically compare your T+0 to regularly configured M3 13
Adjusting Down Inversion Flip Capital Efficient Model Small Positions and Why It s Good to Trade Them Adjusting Up M3U 14
Late entry October 2014 M3 9/15/14 32 DTE down move Safer, more efficient alternative to rolling back butterflies Reduces capital and IV risk in trade until within 10 points of lower long strike at which point it may be configured back into a regular M3 Do Example Acct: OCT 14 Down 1 15
How much we make, or lose in the market is primarily influenced by a combination of three things: Amount of capital we have to trade. Amount of capital we re FREELY willing to risk. The efficiency level at which we re using that capital. 16
Trade more money (assuming you make money with what you ve got) Trade with $10,000 vs. $5,000 Allow larger Delta and Gamma fluctuations (Price movement risk) This is how we can make 30% on a Bearish Butterfly vs. only 10% on an M3 Trade more contracts with greater efficiency Strategically place our options to reduce capital requirement thereby allowing us to sell more premium 17
Capital inefficient by design Why? Learning the trade management concepts are easier that way Deception (but in a good way): People tend to trade too large for their own good By getting away from the balanced butterfly structure we can literally double our number of contracts with the same amount of money and potentially double returns without doubling our price movement risk 18
What do we use for Delta numbers? Depends on what you want Using the same Delta numbers generally yields 50% improvement in $ wins with same max loss numbers Using 1.5X normal Delta numbers generally yields 100% improvement in $ wins with 50% increase max loss numbers in a trending market Using 2X normal Delta numbers generally yields 100% improvement in $ wins with 50% increase max loss numbers in a choppy market Note: In rare situations trading Capital Efficient may result in a loss or win when the normal M3 did the opposite however a vast majority of the time results are similar, but better 19
Late entry October 2014 M3 32 DTE down move 2X contract size Inversion flip 1.5X normal Delta Example 2 APM OCT 14 Down 2 20
Catch 22 Beginners and those with smaller accounts should NOT be trading $50,000 but... Trading smaller positions take significantly more skill to adjust than large positions Beginners should use the IWM/RUT hybrid M3 we show in the more basic programs so they can practice by trading a small position similar to a large position If experienced traders wish to trade small, they should migrate to RUT M3U 21
Trading small positions drastically improves your skills! They are much more challenging to adjust incrementally Means you need to be creative to accomplish the same result You will learn ways of doing thing better and more efficiently which you can apply to your larger trades 22
23
24
25
26
We ll want to keep an eye our Delta/Theta ratio to the upside. Generally when we get to the 1/1 Delta Theta range a creeping up move in the market is going to be a continuous drawdown situation so we ll want to adjust if we spend much time at that ratio. Since we don t have that long call swinging our Gamma positive, we want to limit our total upside risk as much as we can while maintaining room for at least a 20 point move to the down side. Unfortunately there isn t a specific number we can use here but I ll show examples and you ll get a feel for it. 27
Asset: RUT Planned Capital: $5,000 Max Loss: $500 Profit Target: $500 Maximum EOD + Delta +5 Optional Intraday + Delta of 10 Maximum EOD negative Delta inside tent -10 / At edge of tent -7.5 / Outside tent -5 28
Exit Criteria Max loss of $500 Profit target of $500 Any time I am not willing to risk 2.5% of PC drop in p/l Any time a 20 point move will exceed the amount of $ I am freely willing to risk Any time the position cannot withstand a 30 point move without exceeding Absolute Max loss $600 and I cannot correct the position Anytime I cannot meet adjustment parameters Any time I feel it is unlikely to gain further p/l Any time I do not understand my risk. 3 Strikes < 15 DTE Any time I am close to ½ Profit Target < 10 DTE Any time I am emotionally compromised or focusing on the wrong things Any time I break my plan without a valid written reason AND a new plan if needed going forward 29
Vega Negative Theta Positive Maximum upside Delta/Theta Ratio 1:1 All options in same expiration so that we can properly analyze Greeks The T+0 line shall be kept relatively flat and stable to the upside and allow for a minimum of 30 point drop to the downside before maximum loss is exceeded. (after any completed adjustment process) Notice that nowhere did I state anything about exact placement of options 30
Late entry October 2014 M3U 32 DTE down move $5K position 31
Late entry October 2014 M3E (Early Expiration Call) 32 DTE down move Double size, 1.5X Delta $50K position 32