The RUT Bearish Butterfly

SMB TRAINING
OPTIONS TRAINING PROGRAM

Dealing With Large Down Moves

 Disclaimer
 1. SMB TRAINING is NOT a Broker Dealer. SMB TRAINING engages in trader education and training. SMB
TRAINING offers a number of products and services, both electronically (over the internet through
Smbtraining.com) and in person. Through Smbtraining.com, SMB TRAINING offers the “Virtual Trading Floor”, a
community through which independent traders (subscribers), as well as T3 Trading Group, LLC traders, observe a
virtual trading floor environment (as described below) for educational purposes. SMB TRAINING also offers web-
based, interactive training courses on demand.
 2. The seminars given by SMB TRAINING 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 decisions you make, and such decisions will be based solely on your evaluation of
your financial circumstances, investment objectives, risk tolerance, and liquidity needs.
 3. This material is being provided to you for educational purposes only. No information presented constitutes
a recommendation by SMB TRAINING 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, investment objectives, risk tolerance and liquidity needs.
 4. SMB Training and SMB Capital Management, LLC are separate but affiliated companies.
 5. T3 Trading Group, LLC is a Registered SEC Broker-Dealer and Member of the CBOE Stock Exchange (CBSX
www.CBOE.com). All trading conducted by contributors on Virtual Trading Floor is done through T3 Trading
Group, LLC.
6. Any information contained in this presentation is for educational purposes ONLY. Neither Locke In
Your Success, LLC, John Locke nor it’s subsidiaries nor any of their respective officers, employees,
representatives, agents or independent contractors are, in such capacities, licensed financial advisors, registered
investment advisors or registered broker dealers. Neither do they provide investment nor financial advice nor
make investment recommendations, nor are they in the business of transacting trades. Nothing in this
communication constitutes a solicitation, recommendation, promotion, endorsement or offer (buy or sell) by
Locke In Your Success, LLC, or others described above, of any particular security, transaction or investment.
 7. The risk of loss in trading securities, options, futures and forex can be substantial. Customers
must consider all relevant risk factors, including their own personal financial situation, before trading. Options
involve risk and are not suitable for all investors. See the Options Disclosure Document:
Characteristics and Risks of Standardized Options. Trading foreign exchange on margin carries a high level of
risk, as well as its own unique risk factors. Please read the following risk disclosure before considering the
trading of this product: Forex Risk Disclosure. Futures and forex accounts are not protected by the Securities
Investor Protection Corporation (SIPC).
 Position Size
 RUT Butterfly position size - 10 contracts scaling to 30.

 All profit, loss, Delta and Theta numbers within these

guidelines are based off of the above position size.

 If you are trading a different position size, you will need

to adjust these numbers accordingly.

 Delta/Theta ratios are the same regardless of position

size.
 Risk Management and Profit Targets
 Planned Capital - $50,000

 Minimum Capital Required in Account - $100,000

 Profit Target - $15,000

 Reduced Profit Target 21DTE - $5,000

 Max Loss - $15,000

 All decisions are made at 3:30 PM EDT. The daily range is ignored.
UNLESS the trade is over profit target or under 9 DTE and we choose
to stay in the position.
 Trade Exits
 Exit 1 – ($15,000) profit target hit
 Exit 2 – ($5,000) 33% profit target is hit 21 DTE or closer
 Exit 3 – Friday before expiration
 Exit 4 – Maximum loss number ($15,000) is exceeded at 3:30
PM EDT.
 Exit 5 - Any time the preponderance of evidence shows that
the position is more likely to lose money than to make money
if we stay in the trade AND it cannot be corrected.

 If we choose to stay in the position after exit points are hit,

hit position will be monitored and adjusted as needed.
 Trade Set Up
September Expiration
 Date: July 22, 2011
 RUT Price: 842.70
 Entry Strikes: 820
 Purchase 10 – 770/820/870 Put Butterflies
 Control Point: 820
 Add Points: 860/880
 Roll Points: 890/900/910/920/940
 First Downside Adjustment: 780
 Entry Matrix
Buying 10 – 820 Butterflies
Entry Graph
Price Chart on Entry
 August 1, 2011
10 Days
RUT has dropped 50 points to 791
Price Chart
Analyze Graph
 August 2, 2011
RUT drops to 774 below the 780 adjustment point
Analyze Graph Before Adjustment
Roll 820 Butterflies Down to 770
Butterflies
Graph After Adjustment
New Control, Roll and Adjustment Points
 Control Point: 770

 Add Points: 810/830

 Roll Points: 840/850/860/870/890

 Next Downside Adjustment: 730

August 4, 2011- 2 Days
RUT is at 734
Down over 100 points from entry
Price Chart
Analyze Graph
 August 5, 2011
RUT at 713
Down 130 points from entry
Graph Before Adjustment
 Roll 770 Butterflies
Down to 710 Butterflies
Graph of New Position
August 5, 2011
Price Chart
New Control, Roll and Adjustment Points
 Control Point: 710

 Add Points: 750/770

 Roll Points: 780/790/800/810/830

 Next Downside Adjustment: 670

August 9, 2011- 4 Days
RUT at 664
Below 670 Adjustment Point
Graph Before Adjustment
 Roll 710 Butterflies
Down to 660 Butterflies
Graph of New Position
 Price Chart
RUT Down Almost 200 Points
New Control, Roll and Adjustment Points
 Control Point: 660

 Add Points: 700/720

 Roll Points: 730/740/750/760/780

 Next Downside Adjustment: 620

 August 15, 2011- 6 Days Later
RUT Bounces Past The Add Point of 700
Graph Before Adjustment
 Add Second Third
Buy 630/680/730 Butterflies
Graph After Adjustment
Price Chart
August 22, 2011- 7 Days Later
RUT Hit Profit Target Intraday
August 22, 2011
Analyze Graph
August 26, 2011 – 4 Days
21 DTE
August 26, 2011
21 DTE
Price Chart
 Taking The Trade Into Expiration

 It has been a relatively easy month despite a very

large downside move and an aggressive bounce.

 According to the core guidelines, the trade needs

to be exited today.

 More experienced traders who are willing to risk

losing a significant amount of their profit to gain
more, can stay in the trade and even bring it into
expiration in order to do so.
 August 26, 2011
 Up $9700, over the reduced profit target per
guidelines.

 Am I willing to risk 10K to stay in?

 My exit point when trade is down $300

 Still 21 DTE and IV is very high – might want be lax

with adjustments for the first week or so
 August 30, 2011
Up over 30 points in 2 trading days
August 30, 2011 - 3:30 PM – 17 DTE
I let trade go too far !!!
7 point up move knocks me out of the trade
What are our choices?
Price Graph
 Situation
 $1200 from max loss of -$300 **

 Price
move up of $7 knocks us
out of the trade

 Market is over bought

What do I want to achieve?

Best probability to win the

trade without exceeding my
loss number of -$300
 What do I know?
 Increasing position size will increase Gamma and
thus increase my losses with price movement. And
the price is moving… A LOT.

 Flattening Delta to 0 at this volatility, with the trade

near my loss number will virtually kill the chances
of winning the trade UNLESS I can cut Gamma to
near 0

 Substantial execution risk and I’m too close to max

loss to absorb that.
 Best Choices
 Get out

 Reduce size

 Stay Put

**Look outside the box and do something

different with as few moves as possible
 Sell the 680 Butterflies
Buy 10 - 660/680 verticals
Now the trade can withstand a move to
760 and is still ok till 630
September 6, 2011 - 3:30
7 Days – 10 DTE
Graph
September 12, 2011 - 3:30
6 Days – 4 DTE
Graph
 September 13, 2011 - 3:30 PM – 3 DTE
Delta is -348, Too High Going into Close
Graph Before Adjustment
 Remove Verticals
Remove 660 Butterflies
Add 10 – 680 Butterflies
Add 7 – 700 Butterflies
New Position
September 14, 2011 – 12:00 PM – 2 DTE
Delta is -522
Graph Before Adjustment
Buy 6 - 700 Butterflies
Buy 1 – 720 Butterfly
New Delta -423
New Position
September 14, 2011 – 2:00 PM
Delta is -546
Graph Before Adjustment
Buy 3 – 720 Butterflies
New Delta -347
New Position
September 14, 2011 – 3:00 PM
Delta is 807
Graph Before Adjustment
Buy 6 – 720 Butterflies
New Delta -408
New Position
September 14, 2011 – 3:30 PM
Delta is -871
Graph Before Adjustment
Sell 8 – 680 Butterflies
New Delta -249
New Position
September 15, 2011 – 11:00 AM
Expiration Day
Delta is +617
Graph Before Adjustment
Buy 3 – 680 Butterflies
New Delta +378
New Position
 September 15, 2011
Decision Time
Would You Expire the Trade?
Graph
 Price Chart
Market has been moving a lot but not gapping a lot
Remove 680 Butterflies
New Position
Market Opened at 715 and traded to
716.10 by 10:00 AM
Should have profited About
$21,000
Price Chart