© 2012 locke in your success, llc. butterfly trading strategies part 2 of 3, 2/4/12 john locke...

© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.

Butterfly Trading StrategiesButterfly Trading Strategiespart 2 of 3, 2/4/12part 2 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

Risk Management and Risk Management and Profit TargetsProfit Targets

Trade Size: 20 Butterflies to 1 RUT Call (2/1 ratio=PC Trade Size: 20 Butterflies to 1 RUT Call (2/1 ratio=PC 75,000)75,000)

Planned Capital - $75,000Planned Capital - $75,000

Profit Target - $7,500Profit Target - $7,500

Reduce Profit Target - if B/C ratio is altered Reduce Profit Target - if B/C ratio is altered

Max Loss - $7,500Max Loss - $7,500


Entry PositionEntry PositionOctober Expiration 2011October Expiration 2011


Entry PositionEntry PositionOctober Expiration October Expiration

20112011


Entry Position Price ChartEntry Position Price ChartOctober Expiration 2011October Expiration 2011


Talk About Bad Talk About Bad Timing!Timing!


We Do NothingWe Do Nothing


Next Day, August 30Next Day, August 30RUT is up another $12 RUT is up another $12


Implied Volatility will fall Implied Volatility will fall “IF” price stabilizes“IF” price stabilizes


Buy a call vertical to Buy a call vertical to reduce Vega exposurereduce Vega exposure


New PositionNew Position


Price ChartPrice Chart


September 14 – 37 DTESeptember 14 – 37 DTE


Analyze GraphAnalyze Graph


September 22 – 29 DTESeptember 22 – 29 DTE


September 22September 22MatrixMatrix


AdjustmentAdjustment


Position After Position After AdjustmentAdjustment


October 3 – 18 DTEOctober 3 – 18 DTE


This is serious!This is serious!


October 3 – 18 DTE October 3 – 18 DTE


Roll the butterflies back 20 Roll the butterflies back 20 pointspoints


Oops! Oops! Don’t forget about the call.Don’t forget about the call.


Roll Back CallRoll Back Call


Two days later October Two days later October 55


MatrixMatrix


October 7 - 14 DTE October 7 - 14 DTE RUT up 8 more pointsRUT up 8 more points


3 out of 4 isn't bad3 out of 4 isn't bad


Next trading day Next trading day RUT is up 20 more RUT is up 20 more

pointspoints


Analyze GraphAnalyze Graph11 DTE11 DTE


RUT has been all over the RUT has been all over the placeplace


To correct the Theta To correct the Theta and Vega problem …and Vega problem …


I don’t want to stay here for I don’t want to stay here for too long but it works for too long but it works for

nownow


2 Days Later – 9 DTE2 Days Later – 9 DTERUT is at 701RUT is at 701

Up Another 20+ PointsUp Another 20+ Points


Sell the 20 butterfliesSell the 20 butterflies


I sold 20 and bought I sold 20 and bought 10 to cut capital in the 10 to cut capital in the tradetrade


Go to call side to fine Go to call side to fine tune the positiontune the position


Greeks look good!Greeks look good!


Next day RUT is up 14 points Next day RUT is up 14 points and position is negative Theta and position is negative Theta

againagain


Time to get in the tentTime to get in the tent


Expiration ThursdayExpiration Thursday


Do you want to expire the Do you want to expire the Trade?Trade?


If you did…..If you did…..


ProsPros

Very easy trade to manageVery easy trade to manage Allows for wide range of price movementAllows for wide range of price movement Steady returns and low likelihood of big Steady returns and low likelihood of big

losseslosses Potential exists for big returnsPotential exists for big returns Customizable to your own risk tolerance levelCustomizable to your own risk tolerance level Can trade with different instruments (RUT, Can trade with different instruments (RUT,

SPX, NDX)SPX, NDX) Can trade with smaller size – combine RUT Can trade with smaller size – combine RUT

butterflies with IWM callsbutterflies with IWM calls© 2012 Locke in Your Success, LLC.© 2012 Locke in Your Success, LLC.

ConsCons

Expect lower returns; most likely Expect lower returns; most likely will not make 20% - 30%/monthwill not make 20% - 30%/month

If RUT makes big run up late in If RUT makes big run up late in trade, can be difficult to hit profit trade, can be difficult to hit profit target (a risk with any option target (a risk with any option trade)trade)

Profit target relies somewhat on Profit target relies somewhat on RUT settling, or pulling backRUT settling, or pulling back


OV ExamplesOV Examples

April 2011 Exp. : up, then downApril 2011 Exp. : up, then down

June 2011 Exp. : moderate June 2011 Exp. : moderate downdown

August 2011 Exp. : up, crashAugust 2011 Exp. : up, crash


Risk Management and Risk Management and Profit TargetsProfit Targets

Trade Size: 10 Butterflies to 1 RUT Call (1/1 ratio=PC Trade Size: 10 Butterflies to 1 RUT Call (1/1 ratio=PC 50,000)50,000)

Planned Capital - $50,000Planned Capital - $50,000

Profit Target - $5,000Profit Target - $5,000

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 Example 0.66/1 = ½ profit target – 0.33/1 = ¼ profit targettarget

Max Loss - $5,000Max Loss - $5,000


© 2012 locke in your success, llc. butterfly trading strategies part 2 of 3, 2/4/12 john locke...

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