© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Butterfly Trading StrategiesButterfly Trading Strategiespart 3 of 3, 2/4/12part 3 of 3, 2/4/12
John LockeJohn LockeLocke in Your Success, Locke in Your Success,
LLC.LLC.Know what you want, make it happen!Know what you want, make it happen!
I teach traders how to improve their trading and I teach traders how to improve their trading and become more profitable!become more profitable!
www.lockeinyoursuccess.comwww.lockeinyoursuccess.com
Part 2Part 2Bearish Butterfly Bearish Butterfly
The RUT bearish butterfly is a high The RUT bearish butterfly is a high probability, low maintenance trading probability, low maintenance trading system that automatically adapts to system that automatically adapts to market conditions and is designed to market conditions and is designed to
make as much money as possible with make as much money as possible with the smallest possible exposure to the the smallest possible exposure to the
market. market.
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
A multi-butterfly position that is entered A multi-butterfly position that is entered in thirds and is started as a bearishly in thirds and is started as a bearishly
positioned butterfly and then the position positioned butterfly and then the position is scaled into as the market risesis scaled into as the market rises
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
If the RUT rises more than 20 points If the RUT rises more than 20 points from the entry price, add to the from the entry price, add to the
positionposition
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
IF RUT continues to rise to IF RUT continues to rise to more than 40 points over the more than 40 points over the
entry price, add to the position entry price, add to the position
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
If RUT continues to If RUT continues to rise?rise?
The position follows the market with a The position follows the market with a rolling sequence based off of a reference rolling sequence based off of a reference point that is determined at trade entry.point that is determined at trade entry.
By following the rolling sequence the By following the rolling sequence the position will gradually overtake the rising position will gradually overtake the rising price if the market continues to rise.price if the market continues to rise.
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
This works extremely This works extremely well a majority of the well a majority of the
timetime Down marketsDown markets
Sideways marketsSideways markets
Choppy, volatile marketsChoppy, volatile markets
““Normally” rising marketsNormally” rising markets© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
What about extreme up What about extreme up markets and grinding up markets and grinding up
markets?markets?
The system automatically adapts to low The system automatically adapts to low volatility and grinding up market volatility and grinding up market
conditions by modifying add and roll conditions by modifying add and roll points based on points based on
Total position Delta compared to Total position Delta compared to position sizeposition size
Delta/Theta Ratios Delta/Theta Ratios © 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Let’s get into the trade!Let’s get into the trade!
Approximately 56 DTE, enter a butterfly position in RUT with the Approximately 56 DTE, enter a butterfly position in RUT with the short strikes approximately 20 points below the current price. short strikes approximately 20 points below the current price.
Set your reference point at short strikes of the entry butterfly.Set your reference point at short strikes of the entry butterfly.
Record add and roll points which are based off of the reference Record add and roll points which are based off of the reference point as follows. point as follows.
Reference point +40 – add second 1/3Reference point +40 – add second 1/3 Reference point +60 – add last 1/3Reference point +60 – add last 1/3 Reference point + 70 – roll lowest butterfly +60Reference point + 70 – roll lowest butterfly +60 Reference point + 80 – roll lowest butterfly +60Reference point + 80 – roll lowest butterfly +60 Reference point + 90 – roll lowest butterfly +60Reference point + 90 – roll lowest butterfly +60
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Risk Management and Risk Management and Profit TargetsProfit Targets
Trade will start with 10 contracts (butterflies) and scale to Trade will start with 10 contracts (butterflies) and scale to 30 contracts if fully scaled into.30 contracts if fully scaled into.
Planned Capital - $50,000Planned Capital - $50,000
Minimum Capital Suggested in Account - $100,000 Minimum Capital Suggested in Account - $100,000
Profit Target - $15,000Profit Target - $15,000
Reduced Profit Target - $5,000… 21 DTE or closer Reduced Profit Target - $5,000… 21 DTE or closer
Max Loss - $15,000Max Loss - $15,000
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
May 2011 ExpirationMay 2011 Expiration
March 25, 2011 – 56 DTEMarch 25, 2011 – 56 DTE
RUT = 826RUT = 826
Enter 10 put butterflies with short Enter 10 put butterflies with short strikes at 810strikes at 810
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Reference point = 810Reference point = 810Add second third at RUT > 850Add second third at RUT > 850
Add last third at RUT > 870Add last third at RUT > 870First roll point at RUT > 880First roll point at RUT > 880
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Delta and Delta/Theta Delta and Delta/Theta Ratio Guidelines Ratio Guidelines
Most of the time the trade can be managed strictly by the price 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 points, BUT, under certain conditions such as when IV is low or the trade is close to expiration or options prices are being the trade is close to expiration or options prices are being overly skewed for any reason, the price point adjustments overly skewed for any reason, the price point adjustments need to be modified to deal with those conditions.need to be modified to deal with those conditions.
To indentify and adapt to these conditions we will monitor the To indentify and adapt to these conditions we will monitor the Delta and Delta/Theta Ratio of the position.Delta and Delta/Theta Ratio of the position.
Override the normal adjustments to deal with those Override the normal adjustments to deal with those circumstances when the predetermined values are hit. circumstances when the predetermined values are hit.
The predetermined values vary depending on position size and The predetermined values vary depending on position size and what stage of the trade you are in.what stage of the trade you are in.
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
For THIS position size, in THIS stage For THIS position size, in THIS stage ONLY:ONLY:
Max Delta is +/- 250Max Delta is +/- 250 Max Delta/Theta ratio is +/- 1.5/1 Max Delta/Theta ratio is +/- 1.5/1
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
We do nothing till:We do nothing till: RUT = 770 or RUT =850 RUT = 770 or RUT =850
Delta > +/- 250 Delta > +/- 250 Delta/Theta Ratio > +/- 1.5/1Delta/Theta Ratio > +/- 1.5/1
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
6 days later, March 316 days later, March 31RUT is not past add point of 850 but Delta/Theta ratio is RUT is not past add point of 850 but Delta/Theta ratio is
exceeded which should not happen. The options prices are exceeded which should not happen. The options prices are being skewed. being skewed.
Since we did not exceed the add point, we do not add. Instead, 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 to compensate for the skew, we roll the existing position up 20
points. points.
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
New Delta/Theta is 1/1New Delta/Theta is 1/1Add point remains 850Add point remains 850
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
New PositionNew Position
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
April 5April 5RUT has Exceeded 850 RUT has Exceeded 850
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Before AdjustmentBefore Adjustment
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Add the second third to the positionAdd the second third to the positionBecause we did a “forced roll” due to Delta Because we did a “forced roll” due to Delta previously, the position has adapted to the previously, the position has adapted to the
conditions and the new butterflies are put on ATM conditions and the new butterflies are put on ATM
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
New PositionNew PositionNext Add Point is RUT = 870Next Add Point is RUT = 870
New Max Delta is +/- 500New Max Delta is +/- 500Max Delta/Theta Ratio remains +/- 1.5/1Max Delta/Theta Ratio remains +/- 1.5/1
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
April 25, 25 DTE, profit target is exceededApril 25, 25 DTE, profit target is exceededNever had to deploy full capital to the Never had to deploy full capital to the
position $16,200 from $29,100 investment position $16,200 from $29,100 investment in 31 days with unfavorable IV levelsin 31 days with unfavorable IV levels
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
ProsPros
““Usually” easy trade to manageUsually” easy trade to manage
Allows for wide range of price movementAllows for wide range of price movement
High returns with the potential for very big High returns with the potential for very big returns when market behavesreturns when market behaves
Can trade with different instruments (RUT, Can trade with different instruments (RUT, SPX, NDX)SPX, NDX)
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
ConsCons
Profit and loss fluctuates a lotProfit and loss fluctuates a lot
Losses can be fairly largeLosses can be fairly large
High Delta High Delta
Grinding up months can be frustratingGrinding up months can be frustrating
Profit target relies somewhat on RUT settling, or Profit target relies somewhat on RUT settling, or pulling backpulling back
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Dec 2011 ExpirationDec 2011 Expiration
Oct 21, 2011 – 56 DTEOct 21, 2011 – 56 DTE
RUT = 707RUT = 707
Enter 10 put butterflies with short Enter 10 put butterflies with short strikes at 690strikes at 690
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Reference point = 690Reference point = 690Add second third at RUT > 730Add second third at RUT > 730
Add last third at RUT > 750Add last third at RUT > 750First roll point at RUT > 760First roll point at RUT > 760
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
We do nothing till:We do nothing till: RUT = 650 or RUT =730 RUT = 650 or RUT =730
Delta > +/- 250 Delta > +/- 250 Delta/Theta Ratio > +/- 1.5/1Delta/Theta Ratio > +/- 1.5/1
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Next trading day RUT Next trading day RUT exceeds 730exceeds 730
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
New positionNew positionNext add point RUT > Next add point RUT >
750750
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Oct 27, 3 more days, RUT = 768, up over Oct 27, 3 more days, RUT = 768, up over 60 points from entry, not only exceeding 60 points from entry, not only exceeding
add point, but also exceeding first roll add point, but also exceeding first roll pointpoint
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
AHHHH!AHHHH!
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Add in the last 1/3 of the tradeAdd in the last 1/3 of the tradeRoll lowest butterflies up 60 Roll lowest butterflies up 60
pointspoints
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
New PositionNew Position
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
6 days later6 days laterRUT pulls back to 719RUT pulls back to 719
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Position looks nicePosition looks nice
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Nov 9, 37 DTENov 9, 37 DTE
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Nov 21, 25 DTENov 21, 25 DTEProfit Target is Profit Target is
ExceededExceeded
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
GraphGraph
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Part 3Part 3M21 Trade SystemM21 Trade System
Combines the scaling in advantages of the Bearish Combines the scaling in advantages of the Bearish Butterfly (M9) with the loss control techniques of the Butterfly (M9) with the loss control techniques of the M3 and proper trade planning to produce a high M3 and proper trade planning to produce a high probability, high return trading system.probability, high return trading system.
Twice the monthly return of the M3Twice the monthly return of the M3
2/3 the monthly return of the bearish butterfly but 2/3 the monthly return of the bearish butterfly but may outperform the Bearish Butterfly on a yearly level may outperform the Bearish Butterfly on a yearly level in certain market environmentsin certain market environments
Better win rate than the Bearish Butterfly and the M3Better win rate than the Bearish Butterfly and the M3
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
M21 Trade SystemM21 Trade System
In order to trade the M21, you In order to trade the M21, you must fully understand all the must fully understand all the concepts of both the M3 trade concepts of both the M3 trade AND the M9 (Bearish AND the M9 (Bearish Butterfly). Otherwise you will Butterfly). Otherwise you will not be able to properly not be able to properly manage the trade!manage the trade!
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Starts out like an M3Starts out like an M3
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Go in with full number of butterfliesGo in with full number of butterflies
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Then use a reference points and roll points to Then use a reference points and roll points to adjust out the position in thirds like the Bearish adjust out the position in thirds like the Bearish
ButterflyButterfly
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
1/3 adjusted out1/3 adjusted out
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Butterflies get spread out and rolled Butterflies get spread out and rolled forward and back with price forward and back with price
movementmovement
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
2/3 adjusted out2/3 adjusted out
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Uses a combination of Greeks Uses a combination of Greeks and Greek Trends to determine and Greek Trends to determine
adjustmentsadjustments
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
And uses Delta control And uses Delta control techniques of M3techniques of M3
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
OV ExamplesOV Examples
Sept 2010 Exp. : down, then upSept 2010 Exp. : down, then up
Jan 2012 Exp. : up and upJan 2012 Exp. : up and up
Bearish butterfly had big draw Bearish butterfly had big draw downs both these monthsdowns both these months
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Risk Management and Risk Management and Profit TargetsProfit Targets
Trade Size: 30 butterflies to 3 RUT callsTrade Size: 30 butterflies to 3 RUT calls
B/C Ratio: 1/1 ratio=PC 50,000 per callB/C Ratio: 1/1 ratio=PC 50,000 per call
Planned Capital - $150,000Planned Capital - $150,000
Profit Target - $30,000Profit Target - $30,000
Reduce Profit Target - if B/C ratio is altered Reduce Profit Target - if B/C ratio is altered
Example 0.66/1 = ½ profit target – 0.33/1 = ¼ profit targetExample 0.66/1 = ½ profit target – 0.33/1 = ¼ profit target
Max Loss - $30,000Max Loss - $30,000
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Locke In Your Success, Locke In Your Success, LLCLLC
John LockeJohn Locke www.lockeinyoursuccess.com [email protected]@lockeinyoursuccess.com Facebook: Locke in Your SuccessFacebook: Locke in Your Success Twitter: locke4successTwitter: locke4success 603-738-1795603-738-1795
Just Released !!!Just Released !!!
I’ve teamed up with SMB Training, a premier Options I’ve teamed up with SMB Training, a premier Options Training Firm based in NYC, and produced a Training Firm based in NYC, and produced a comprehensive training program that teaches the comprehensive training program that teaches the Bearish Butterfly Trading System. Bearish Butterfly Trading System.
Check out the links below for more on the Bearish Check out the links below for more on the Bearish Butterfly:Butterfly:
Purchase the Bearish Butterfly Training System here:Purchase the Bearish Butterfly Training System here:
https://www.smbtraining.com/cart/checkouthttps://www.smbtraining.com/cart/checkout
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
Important LinksImportant Links
My website:My website:
www.lockeinyoursuccess.comwww.lockeinyoursuccess.com
My interview with Tim Bourquin of Traderinterviews.com:My interview with Tim Bourquin of Traderinterviews.com:
http://www.traderinterviews.com/pro/2012-02-16_JohnLocke-ButterflyOptions.php
Direct link to the Bearish Butterfly Training Program, the first step in your Direct link to the Bearish Butterfly Training Program, the first step in your success to trading butterflies:success to trading butterflies:
https://www.smbtraining.com/product/bearish-butterfly-options-strategy
One of my students with the M3: One of my students with the M3: https://smbcap.webex.com/ec0605ld/eventcenter/enroll/register.do?https://smbcap.webex.com/ec0605ld/eventcenter/enroll/register.do?siteurl=smbcap&formId=4688957&confId=4688957&formType=1&loadFsiteurl=smbcap&formId=4688957&confId=4688957&formType=1&loadFlag=1&eventType=1&accessType=viewRecordinglag=1&eventType=1&accessType=viewRecording
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.
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Executing Live Complex Options SpreadsExecuting Live Complex Options Spreads
© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.