The M3 Options Trading System - Page 16 - Horse Racing Forum - PaceAdvantage.Com

PaceAdvantage · 05-29-2015, 11:02 AM

Just took the opportunity to exit my June M3 on this nice little drop just now in the market...once again, I did not reach my target goal...unfortunately...it is SO DAMN HARD to get a fill anywhere near the midpoint with these butterflies, and since today was my rules-based exit day (20 days to expiration), I decided I'm not going to take any more chances and just get out with a healthy profit nonetheless....boxscore:

Code:

Date	Time		Trade Description						Fees	Comm	Amount
4/29/15	14:29:51	BOT +3 BUTTERFLY RUT 100 JUN 15 1280/1230/1180 PUT @10.62 CBOE	-0.35	-18.99	-3,186.00
	14:31:25	BOT +5 IWM 100 JUN 15 124 CALL @3.16 CBOE			-0.15	-13.74	-1,580.00
4/30/15	15:58:53	SOLD -1 IWM 100 JUN 15 124 CALL @1.75				-0.04	-10.74	175.00
5/5/15	15:59:42	SOLD -1 IWM 100 JUN 15 124 CALL @1.40 CBOE			-0.04	-10.74	140.00
5/14/15	15:51:31	BOT +1 VERTICAL RUT 100 JUN 15 1230/1240 CALL @6.30 CBOE	-0.06	-11.49	-630.00
5/19/15	09:47:13	BOT +1 VERTICAL RUT 100 JUN 15 1230/1240 CALL @7.00 CBOE	-0.06	-11.49	-700.00
5/29/15	10:47:57	SOLD -3 BUTTERFLY RUT 100 JUN 15 1280/1230/1180 PUT @18.06	-0.35	-18.99	5,418.00
	10:50:40	SOLD -3 IWM 100 JUN 15 124 CALL @1.49				-0.10	-12.24	447.00
	10:53:20	SOLD -2 VERTICAL RUT 100 JUN 15 1230/1240 CALL @6.20 CBOE	-0.12	-12.99	1,240.00
											-------------------------
													+1,201.32

PaceAdvantage M3 Trading Tour 2015
_______________________________
January...+311.93
February..+755.51
March......-359.98
April........+239.98
May.........+795.25
June........+1,201.32
-----------------------
TotalYTD..+2,944.01

PaceAdvantage · 05-29-2015, 11:15 AM

I was just looking at my trade records...and it looks like something unbelievable happened when I closed my butterfly...

I put that order in for $17.80 limit (the listed mid-point at that time - 10:47:57am) and got filled at $18.06. Guess I got a little lucky after all...

PaceAdvantage · 05-29-2015, 11:22 AM

Quote:

Originally Posted by barn32

The M3 is becoming the bane of my existence. It's a wearisome trade.

1. Large capital outlays, which takes away capital from other trades that are, in many cases, more profitable than the M3.
2. Long time frames
3. Multiple adjustments that must be made if you want to keep on top of the position.
4. I've run out of margin on several occasions.
5. OptionVue can be buggy and frustrating at times, but it does have the most accurate Greek numbers.
6. The trade can get complicated, especially when rolling or even exiting.

I've actually had better success doing shorter time frame trades (one month or less) than the longer term trades. I've had more winning trades than losing ones, and I'm up slightly overall, but I have had several disasters, which shows you what can happen if you let things get away from you. (I was out of town during one such fiasco, away from my computer and trying to trade on my phone during a time when the RUT was down 40 points in one day...tsk, tsk, tsk.) [In the interest of full disclosure, as painful as it might be, I've included a screenshot of all of my M3 trades since I started and the running totals.]

All that said I opened a small (2-lot) July 17 M3 today in my IRA account.

Here is a screenshot of my June M3. OptionVue says I'm down $344, but I'm actually down about $50. (A few days ago I was up $700 if you can believe OptionVue.) I've made multiple adjustments. My Delta was minus 700 at one point, but I just didn't feel like adjusting. I went ahead and fixed everything today.

As you can see by the graph the trade has good potential. Whether or not I will realize that potential remains to be seen.

I still can't fathom why the left side of your graphs all show your (T+expiration) line sloping sharply downward as price heads to 0.

On every single M3 I've traded, the left side of my graphs never slope down off the edge of the screen...they always flatten out at a max-loss level that will remain that amount even if the Russell 2000 were to go to 0.

It looks like you have unlimited loss as the price of the Russell heads down...or if not unlimited, something humongous...your max loss should not really be above $5,000 per lot traded...and it should be well BELOW $5,000 per lot at the start of the trade...it may get a bit above $5,000 as you add adjustments such as verticals or calls.

Something just doesn't look right, and I'm wondering how you get your graphs to look like that...they look nothing like my graphs (on the left side).

barn32 · 05-29-2015, 07:08 PM

Quote:

Originally Posted by PaceAdvantage

I still can't fathom why the left side of your graphs all show your (T+expiration) line sloping sharply downward as price heads to 0.

John Lock's graphs do the same exact thing, and when I asked him about it he said it was perfectly normal. When you start adding lots of verticals it has that effect.

And don't forget. These are not butterfly's spreads with pre defined win/loss numbers. They are M3s, and as a result are constructed and maintained differently.

If I were to do straight butterfly trades, then yes, my max loss would be defined.

Another thing to keep in mind is that if the market were to slowly grind up and keep going up and up, the M3 is designed to break even.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~

I put in a mid-point bid of $11.86 yesterday for my July M3 butterfly and instantly got filled at $11.70. Either the software hadn't caught up and the midpoint on my platform was wrong, or I made a mistake. Either way IB gave me the best possible price considering.

[I usually check the mid price first by looking at the individual leg prices and calculating it manually, but I was lazy yesterday and wanted to get filled fast so I didn't bother. Had I done that I would have realized the midpoint on my software was wrong and entered a different bid. It's a good way to double-check.]

RE closing out your June M3 today: What was your Theta when you closed the trade? If it was say, $150, then by not waiting until Monday morning you might have theoretically cost yourself ~$300. (Depending on what the market does of course.) $450 if you closed out out Monday at the bell.

Theta works in your favor over the weekend too.

leekaufman · 05-29-2015, 09:33 PM

Hey Barn32, thanks for such wonderful transparency around your trading!

If you're interested, I have a few thoughts based on what I see in your posts/data:

1) Where you say "weekly", I'm assuming that you're trading weekly options here (am I right)? If so, hardly anyone who trades the M3 professionally trades weeklies. There just isn't enough volume and the bid/ask spreads can be way too wide.

2) Many traders only adjusts their M3 trades in the last hour or so. So it's a trade that doesn't have you in front of your computer very often, and you're only having to adjust maybe 3-6 times per cycle - unless you trade toward expiration, and then you know you're at the mercy of Gamma and everything speeds up. I don't know of many ways you can make 25-40% per year, not actively sitting in front of your computer all day, while still having really good control over the downside.

3) With a trade like the M3, to trade it effectively your capital allocation has to be there from the get go. John Locke does 50K for a full-sized M3. I know traders who allocate around 30K because they know how to make more cost effective adjustments, and also because they're out of the trade by 14DTE. You should never be running out of margin, because your trading size should always be determined by your maximum possible margin.

4) Trading this thing near expiration takes a whole lot of knowledge and comfort with the trade, and unless someone's back-tested the heck out of it trading it to expiration, they're kind of rolling the dice, and will likely be in a load of trouble when volatility picks up unexpectedly.

5) At John's recent Advanced Position Management course (which I didn't attend), I heard that John talked extensively about back-testing every trade after it's done, to make sure you followed your plan, and to take away lessons that will help in the future when similar market events happen. That seems like really sage advice to me.

All that said, with the exception of your two big losses, and being in the somewhat early stages with this trade, it seems like you're doing a really good job.

Have a great weekend!

barn32 · 05-30-2015, 06:29 AM

Quote:

Originally Posted by barn3

I put in a mid-point bid of $11.86 yesterday for my July M3 butterfly and instantly got filled at $11.70. Either the software hadn't caught up and the midpoint on my platform was wrong, or I made a mistake. Either way IB gave me the best possible price considering.

.

I meant to say $10.70 not $11.70.

barn32 · 05-30-2015, 09:39 AM

Quote:

1) Where you say "weekly", I'm assuming that you're trading weekly options here (am I right)? If so, hardly anyone who trades the M3 professionally trades weeklies. There just isn't enough volume and the bid/ask spreads can be way too wide.

3) With a trade like the M3, to trade it effectively your capital allocation has to be there from the get go. John Locke does 50K for a full-sized M3. I know traders who allocate around 30K because they know how to make more cost effective adjustments, and also because they're out of the trade by 14DTE. You should never be running out of margin, because your trading size should always be determined by your maximum possible margin.

4) Trading this thing near expiration takes a whole lot of knowledge and comfort with the trade, and unless someone's back-tested the heck out of it trading it to expiration, they're kind of rolling the dice, and will likely be in a load of trouble when volatility picks up unexpectedly.

I have been trading weeklys and I haven't had much problem getting filled. Sometimes I have to pay up 10, 20 or 30 cents more but $20 or so more isn't all that much in in the overall scheme of things.

With all of the other trades I have going on I did run out of margin on a few occasions, and I had to liquidate another position in order to make the necessary adjustments for the M3. I have discovered that once you start adding verticals it can quickly add to your margin requirements. It's just something I'll have to watch more closely from now on or trade smaller size.

As far as trading close to expiration is concerned, I've yet to have one trade show any kind of decent profit halfway through the trade. Most of the large Theta decay kicks in closer to expiration.

I know that John Locke carries a lot of his trades close to expiration if not all the way through expiration. There's nothing wrong with doing that if you know how to manage the trade close to expiration. I'm not saying that I do know how to do that very well, but I'm learning as I go along. John Locke's M21 techniques go into that sort of thing in a lot more detail.

PaceAdvantage · 05-30-2015, 12:28 PM

Quote:

Originally Posted by barn32

John Lock's graphs do the same exact thing, and when I asked him about it he said it was perfectly normal. When you start adding lots of verticals it has that effect.

And don't forget. These are not butterfly's spreads with pre defined win/loss numbers. They are M3s, and as a result are constructed and maintained differently.

If I were to do straight butterfly trades, then yes, my max loss would be defined.

Another thing to keep in mind is that if the market were to slowly grind up and keep going up and up, the M3 is designed to break even.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~

I put in a mid-point bid of $11.86 yesterday for my July M3 butterfly and instantly got filled at $11.70. Either the software hadn't caught up and the midpoint on my platform was wrong, or I made a mistake. Either way IB gave me the best possible price considering.

[I usually check the mid price first by looking at the individual leg prices and calculating it manually, but I was lazy yesterday and wanted to get filled fast so I didn't bother. Had I done that I would have realized the midpoint on my software was wrong and entered a different bid. It's a good way to double-check.]

RE closing out your June M3 today: What was your Theta when you closed the trade? If it was say, $150, then by not waiting until Monday morning you might have theoretically cost yourself ~$300. (Depending on what the market does of course.) $450 if you closed out out Monday at the bell.

Theta works in your favor over the weekend too.

I don't get that. I am going by his original M3 rules. I haven't looked at any of his newer material.

My trades are ALWAYS pre-defined in terms of max/loss. Usually, with a 3-lot, my max loss is around 4000-4500 depending on how late I get into it. Each vertical I add tends to add about $700 or so of extra risk. So by the end of my last trade, I was looking at a theoretical max loss of about $6000, give or take a hundred here or there.

I've NEVER, in the year and a half I've been trading this, had a T+expiration line sloping sharply downward, on the left side of the graph...you've seen all the graphs I've posted here...I guess we're trading two different things.

Either that, or your graph is cut off before you show your T+expiration line leveling off to a straight line...

PaceAdvantage · 05-30-2015, 12:29 PM

Oh, and my theta by trade's end was somewhere around 60-70...somewhere in that general area...it wasn't three figures...

And correct me if I'm wrong, but I thought market makers work the weekend theta into the mix as the day wears on? So it's not like you have to wait until Monday to get the weekend theta...you get it through the day on Friday...or something like that...my terminology sucks and I'm probably not expressing myself very well, but I thought I read where the weekend theta is taken care of and accounted for before the end of the trading day on Friday....it's all eventually reflected in the price as Friday chugs along...

PaceAdvantage · 05-30-2015, 12:38 PM

And by the way, I LOVE this trade...I've shown a profit in 5 of 6 months thus far...and I have NOT been trading this thing anywhere near perfectly...I've made plenty of mistakes.

This meshes nicely with what happened to me last year, my first year trading this every month, although last year, while only trading one-lot, I seem to remember being able to close out close to half my trades at max profit...so far this year, I haven't been able to close any at max profit: $1,500.

barn32 · 05-30-2015, 06:48 PM

Quote:

Originally Posted by PaceAdvantage

And correct me if I'm wrong, but I thought market makers work the weekend theta into the mix as the day wears on? So it's not like you have to wait until Monday to get the weekend theta...you get it through the day on Friday...or something like that...my terminology sucks and I'm probably not expressing myself very well, but I thought I read where the weekend theta is taken care of and accounted for before the end of the trading day on Friday....it's all eventually reflected in the price as Friday chugs along...

It looks like you are correct and I was wrong. Not sure where I came up with that.

Weekend Theta Decay

PaceAdvantage · 05-31-2015, 01:04 AM

Yup, I think that link you posted was the article I recall reading...

badcompany · 05-31-2015, 09:41 AM

A few questions:

1. What is the average time frame for these trades?

2. What type of odds are you getting?

3. What is the hit rate you are shooting for?

As an aside, Mike, any Saratoga plans, this year?

barn32 · 05-31-2015, 08:23 PM

Quote:

Originally Posted by badcompany

A few questions:

1. What is the average time frame for these trades?

2. What type of odds are you getting?

3. What is the hit rate you are shooting for?

As an aside, Mike, any Saratoga plans, this year?

1. 14-60 days (depends on your time horizon. I've done 14 days to 59 days) 2. Even money (give or take.) 3. 100%. (Realistically, about 75-95%. I think John Locke had one losing trade last year.)

PaceAdvantage · 06-01-2015, 12:15 PM

Quote:

Originally Posted by badcompany

A few questions:

1. What is the average time frame for these trades?

2. What type of odds are you getting?

3. What is the hit rate you are shooting for?

As an aside, Mike, any Saratoga plans, this year?

My answers are a bit different...

1) 30 days
2) With a $1,500 profit target and a $1,500 max loss (trading 3 lots this year), it's theoretically even money, although your theoretical max loss could be about $5,000 if the shit hits the fan in a major way. But as you can see, I have yet to hit my profit target this year...and in fact, the odds I've gotten this year have been more like 1/5...lol...with an 83% hit rate. Which coincidentally or not, equals 1/5...
3) I would go with 75% give or take a few pct points
4) No plans for Saratoga as of yet...I hope to get up there, but I can't plan on it...hopefully by next year, I can start planning well in advance to get back up there...