John Locke Part 3-2-12a

© 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.


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


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


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


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.


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


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


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


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


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.


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


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


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.


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


New PositionNew Position


April 5April 5RUT has Exceeded 850 RUT has Exceeded 850


Before AdjustmentBefore Adjustment


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


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


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


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)


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


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


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


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


Next trading day RUT Next trading day RUT exceeds 730exceeds 730


New positionNew positionNext add point RUT > Next add point RUT >

750750


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


AHHHH!AHHHH!


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


New PositionNew Position


6 days later6 days laterRUT pulls back to 719RUT pulls back to 719


Position looks nicePosition looks nice


Nov 9, 37 DTENov 9, 37 DTE


Nov 21, 25 DTENov 21, 25 DTEProfit Target is Profit Target is

ExceededExceeded


GraphGraph


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


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!


Starts out like an M3Starts out like an M3


Go in with full number of butterfliesGo in with full number of butterflies


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


1/3 adjusted out1/3 adjusted out


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

movementmovement


2/3 adjusted out2/3 adjusted out


Uses a combination of Greeks Uses a combination of Greeks and Greek Trends to determine and Greek Trends to determine

adjustmentsadjustments


And uses Delta control And uses Delta control techniques of M3techniques of M3


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


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



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


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



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John Locke Part 3-2-12a

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