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Transcript of A World Leader in Options Education - Amazon S3Part+2-32+slides... · A World Leader in Options...
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© 2015 Locke in Your Success, LLC.
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.”
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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.
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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.
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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
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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
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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
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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
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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
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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
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Adjusting Down – Inversion Flip
Capital Efficient Model
Small Positions and Why It’s Good to Trade Them
Adjusting Up
M3U
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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
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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.
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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Late entry October 2014 M3U
32 DTE down move
$5K position
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Late entry October 2014 M3E (Early Expiration Call)
32 DTE down move
Double size, 1.5X Delta
$50K position
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