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Disclaimer
•  This presentation is for educational purposes only and not a
recommendation that you do anything that I do or show you
•  I am not a broker/dealer, investment advisor, or affiliated with
any financial institution
•  Trading is risky, you can and probably will lose money
•  You will probably not be able to recreate the trade results
shown in the examples due to execution, slippage, etc.

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 Speaker Bio
14 year options journey

Study, Practice, Lose Money

Engineer Strategic Trader
& Product
Manager •  Market Assessment
Marketer &
Market
•  Strategy Selection & Plan
•  Keep It Simple (Executable)
Researcher
•  Success/Change Metrics
Strategist/Planner
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What We’ll Be Discussing
•  Quick reminder on the butterfly
•  Discuss goals of Technical Analysis trading
•  Show some technical analysis tools I use
•  Review some trades to show how I apply technical analysis in
trading butterflies
–  Not teaching any particular butterfly strategies
–  This can be applied to any of option strategy being taught
–  I like butterflies because of the ease in managing the risk curve

•  Summary

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Review: What is a Butterfly?

BULL BEAR LONG

VERTICAL VERTICAL BUTTERFLY

•  Delta Neutral, Theta Decay strategy

•  Vega sensitive, declines over time
•  Gamma sensitive, increases over time
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Key Characteristic: Projected P/L Curves
“Bleed” Outside of Expiration Curve

t+27 t+36 (expiration)

t+18
t+9
t+0
BLEED

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What Is Technical Analysis?
•  Use of historical price and/or volume over some time period to
clarify past market behaviors (and maybe eliminate noise)
–  Essentially, tries to figure out what the big money is doing
•  Based on the assumption that past behaviors will repeat
–  Akin to options pricing assumptions about standard deviation
•  Assumes price action represents all information: fundamental
and emotional/behavorial
–  e.g. Hopes, fears, forecasts, beliefs, weather predictions,
inter-market behavior, crisis actions, threats, etc.

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List of Technical Studies in TOS
•  314 studies (from ADX to ZigZagTrendSign)
•  8 Fibonacci measuring studies (Retracements, Extensions, Time Series,
Time Ratios, Time Extensions, Arcs, Fans, and Spirals)
•  2 Other measuring studies (Andrew Pitchfork and Cycle Brackets)
•  4 Chart Modes (e.g. Normal, Monkey Bars, Seasonality)
•  7 Chart Types (e.g. Bar, Candles, Heiken-Ashi, EquiVolume)
•  Candlestick and Price Patterns
•  More to come …

All are combinations of price and/or volume over time

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Technical Analysis End Goal Is Simple

MOMENTUM REVERSAL
STALL POINT

Key TA Questions for Trading Butterflies

1.  What is the trend?
2.  Where will price likely stall or reverse?
… In other words, what is the big money doing where?
TREND
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Technical Analysis is Just Another
Probability Indicator
•  Trading by the options table (Delta or Probability of Touch or
Probability of Profit, etc) uses a distribution curve to determine
the market’s probability for where price will be
•  Trading by Technical Analysis uses previous price points and
volume (and patterns) to determine the market’s “probability” for
where price will be*
•  Neither can portend black swan events
•  My goal is using TA is to understand what and where big money
and algorithmic traders are doing
*see Bulkowski’s ThePatternSite.com for more info

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 Technicals We’ll Explore Today To
Address the Key Questions
•  Seasonality (Big Picture)
•  Moving Averages (Trend)
•  Horizontal Support and Resistance (Stall points)
•  Market Forecast in TOS (Momentum Oscillator)
•  Ichimoku Cloud (Mid-term trend)
•  Not discussed but they can work or help as well
–  MACD, Stochastics, Money Flow, Volume Profile, Fibonacci, etc.

What works for you and where is there confluence?

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Big Picture – Seasonality Trend

Source: LeavittBrothers.com Source: Stockcharts.com

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Big Picture – Seasonality Trend

Market Seasonality
•  Not something I
trade but am aware
of (need validation)
•  More cautious
Daily Chart
(neutral to negative
2017 vs. 5 Yr Average
delta) through the
summer
•  Preparing bearish
trades and hedges
in Aug - Sept
timeframe
Source: ThinkOrSwim
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Trend – Find the Current Direction

Higher Highs

Multiple Moving
Averages
Higher Lows

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Support and Resistance

Moving Average
Support
Prior Resistance
Is New Support
Prior Support

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Market Forecast (Sentiment Oscillator)

Short Term Line Intermediate Term Line

- Swing trader sentiment - Active trend traders

UPTREND

DOWNTREND

Momentum Line (very noisy on a daily basis)

- Day traders sentiment
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 Ichimoku Cloud (Trend and S/R)

Forward
Forecast
UPTREND
(above cloud) UNDECIDED Strength of
(in cloud) Resistance

DOWNTREND
(below cloud)

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Using VIX to Confirm

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Technical Analysis: Things to
Remember/Don’t Get Confused
•  Most traders/mentors/systems are teaching/selling picking
“near” bottoms and tops
–  Your edge comes from time decay, not picking tops and
bottoms
–  You edge comes from where price won’t be, not where its
going
•  Trading a range, you really only need to know:
–  What is the trend?
Risk Direction
–  What is the strength of the trend?
–  Where might the trend pause/reverse?

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 So How Do I Use This Information?
•  Check SPX and VIX trend
•  Set lower risk in trend direction
•  Try to cover support and/or resistance in body of fly
•  Use BWB with short below 1st support level (for uptrend)
Use Wide BWB with short ATM (for sideways trend)
Use Balanced Butterfly with short below current price to create more
negative deltas (for downtrends)
•  Compare these levels with option probabilities of strikes and PoP
•  Time entry to minimize near-term adjustments (want enough time for
theta to help trade)
•  Use stall points and breaks to determine adding or adjusting butterfly (in
addition to P&L adjustment points and delta/theta ratios)
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Trade Examples

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Sideways Market

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Price Chart – 9/14/2016

VIX = 15.16

SPX = 2159

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Market Assessment
•  Seasonally, should be nearing end of down period and moving
into an up period
•  Market trend had been moving sideways for since 7/15
•  Big move down to support at top of cloud on Friday 9/9 followed
by large move up back into channel on Monday 9/12
•  Market Forecast shows Intermediate Line moving down but Short
Term line turned up indicating slowdown in downside momentum
•  VIX elevated relative to levels since 7/15
•  Expectation is that price would return to the trading range
between the cloud and previous high; possibly breaking out by
November
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Market Strategy & Plan
•  Strategy: 55 – 60 DTE ATM BWB – wide fly
•  Target: 15% of initial margin
•  Planned Capital: 2x of initial margin
•  Max Loss: 1.2x of target
•  Warning Check Points:
–  Breakout of channel with Market Forecast support
–  Down 5% - 10%
–  15 DTE
–  Theta no longer rising
–  Delta:Theta ratio greater than 50%
•  Adjustment Plan:
–  Roll shorts out to cut delta
–  Take profits when target hit
–  Take partial profits if outside 15 DTE and price is near shorts
–  Close by 5 DTE

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ATM SPX BWB Trade (60 DTE) on 9/14/2016
11Nov16 (60 DTE)
Long 2 2225 C
65w
SPX = 2159.17 Short 2 2160 C
VIX = 15.16
Short 2 2150 P
125w
Long 2 2025 P

Delta -1.25
Gamma -0.31
Theta 37.48
Vega -378.51

Credit = $59.60
Margin = $13,080
PoP = 42%
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SPX on 9/14 (60 DTE)
2219.83
Delta -1.25
Breakeven Gamma -0.31
Theta 37.48
2089.44 Vega -378.51

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VIX on 9/14
•  VIX elevated
•  Small pop in
VIX with SPX
pop
•  Market
Forecast short
term line
pointing down
so slowing VIX
momentum

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Two Weeks Later – 9/26 (46 DTE; 14 DIT)
2219.83
Delta 3.96
Breakeven Gamma -0.52
Theta 54.98
2089.44 Vega -432.30

P/L = $530
P/L % = 4.05%

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10/12 Wednesday (30 DTE; 30 DIT)
2219.83
Delta 11.31
Breakeven Gamma -1.04
Theta 93.24
2089.44 Vega -497.96

P/L = $1875
P/L % = 14.33%
•  Considered
taking it off and
starting a new
one 60 DTE out

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10/18 (24 DTE; 36 DIT)
Delta 13.33
2219.83
Gamma -1.38
Breakeven Theta 120.46
2089.44 Vega -514.86

P/L = $2810.00
P/L % = 21.48%
•  Hit 15% target
on Friday but
decided to
wait through
weekend
•  Took ½ off

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10/27 (11 DTE; 45 DIT)
2219.83
Delta 14.13
Breakeven Gamma -0.99
2089.44 Theta 89.29
Vega -232.30

P/L = $3435.00
P/L % = 26.26%
•  Divergence on
MF, below 50
line, and
downtrend
indicated
•  Closed trade
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10/27 (11 DTE; 45 DIT)
Delta 14.13
Gamma -0.99
Theta 89.29
Vega -232.30

P/L = $3435.00
P/L % = 26.26%
•  Closed trade
•  P/L risk from
small down
moves not
worth staying

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Where Did Market Go Next Few Days?

ENTRY EXIT

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Up trending – Bullish Market

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Price Chart – 9/22/2016 Thursday

VIX = 12.02

SPX = 2177.18

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Market Assessment
•  Seasonally, market should be entering favorable uptrend months
•  Market broke out of neutral ichimoku cloud area and closed
above the long red candle (back into channel)
•  Market Forecast shows Intermediate Line and Short Term line
both in an uptrend (though ST line is turning showing momentum
waning)
•  VIX Market Forecast Intermediate Line trending down, Short Term
in reversal zone
•  Expectation is that price broke out and would continue up to
resistance before stalling around 2190; could pullback into cloud
or consolidate in next few days due to VIX Market Forecast

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 Market Strategy & Plan
•  Strategy: 45 – 60 DTE OTM BWB with little risk to upside (and lots of room to the
downside)
–  Like less than $1.00 debit
–  Keep entry delta near zero (can be slightly positive or negative)
–  Set shorts below support
•  Target: 10% of initial margin
•  Planned Capital: 2x of initial margin
•  Max Loss: 1.2x of target
•  Warning Check Points:
–  Price pulls back near short strike
–  Down 5% - check if due to IV
–  15 DTE
–  Theta no longer rising
–  Delta:Theta ratio greater than 50%
•  Adjustment Plan:
–  Roll shorts out or longs in to cut delta
–  Reposition fly on down move past shorts
–  Narrow spreads on both sides to maintain margin level
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SPX on 9/22/16

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OTM SPX BWB Trade (43 DTE) on 9/22/16
4Nov16(43 DTE)
Long 3 2165 P
SPX = 2047.21 40w
VIX = 15.57 Short 6 2125 P
75w
Long 3 2050 P

Delta 4.37

95 points of downside room

Gamma -0.17
Theta 27.61
Vega -167.15

Credit = $0.15
Margin = $10,455
T/$ = 0.0026
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OTM SPX BWB Trade (43 DTE) – Opt. 2
4Nov16(43 DTE)
Long 3 2150 P
SPX = 2047.21 50w
VIX = 15.57 Short 6 2100 P
100w
Long 3 2000 P

Delta -0.82
125 points of downside room Gamma -0.12
Theta 35.65
Vega -160.92

Debit = $1.00
Margin = $15,300
T/$ = 0.0023
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SPX on 9/22/16

Where to place short?

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SPX on 9/22 (43 DTE)
Delta 4.37
Gamma -0.17
Theta 27.61
Vega -167.15
Breakeven
4Nov16(43 DTE) •  Went with
2084.57 Option 1
•  Could pullback to
center of fly at
1975.48 strong support
Breakeven •  Did not feel we
would have a
correction to the
2100 level
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9/26/16 (39 DTE, 4 DIT)

Breakeven
2084.57
Where to place short?

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9/26 (39 DTE; 4 DIT)

Delta 11.66
Gamma -0.28
Theta 38.48
Vega -218.52

P/L = -$375
P/L % = -3.59%
•  Option 2 would
have been
down about 1%

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10/13/16 – 17 Days Later (22 DTE, 21 DIT)
•  Likely bottom
•  Short Term
Line starting
up
•  Hammer
candlestick
BE = 2084.57
pattern
•  Still above
short strike

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10/13 (22 DTE; 21 DIT)
Delta 13.37
Gamma -0.72
Theta 92.42
Vega -297.64

P/L = $585
P/L % = 5.60%
•  Enough time went
by to bring t+0 up
to be profitable
•  Option 2 would
have been up
$1,110 (7.25%)

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10/20/16 A Week Later (15 DTE, 28 DIT)
•  Bouncing but
in neutral
zone
•  Intermediate
Line up but
Short Term
Line trending
down
BE = 2084.57 •  Expect a little
pullback
•  15 DTE so
trade starts to
need more
watching
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10/20 (15 DTE; 28 DIT)
Delta -21.57
Gamma -1.32
Theta 157.31
Vega -369.97

P/L = $2,137.50
P/L % = 20.44%
•  Profit target hit;
exited half
•  Negative delta
so okay with
pullback

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 Using TA with Butterflies- Summary
1.  Assess the Market (ex: SPX and VIX) – seasonality, major upcoming
announcements, trend, support & resistance, and oscillator trends
2.  Choose a butterfly strategy to match our TA opinion
–  What areas I want the butterfly body to cover; Where I want less risk (direction of
trend)

3.  Set up the greeks of the butterfly to match your TA conviction

–  How much delta do I want; What do I want the t+0 curve to cover

4.  Through the trade, continue to evaluate the technicals against the
butterfly’s P/L time curves and greeks trend
5.  Manage the risk and RoR (return on risk) against your TA
6.  Never lose sight of your current P&L

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Questions?

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