The M3 Options Trading System

[barn32]

OK, I think I answered some of my own questions about your graph. Current position is 1238, obviously.

Your position is fixable. Add some verticals until your T+0 line straightens out. You can center the verticals off of your short strike.

Add enough verticals to bring your delta down to a reasonable number and that also makes your Vega negative.

As long as you don't have to roll, just keep adding verticals when your delta/vega numbers get out of whack.

In one of my short term M3s I had 23 verticals at one point. When I closed the position, all of my profit came from those verticals.

[PaceAdvantage]

Well, considering tomorrow is 20DTE, I think I'm going to take the loss...I personally think it's too dangerous and too late in the game to try and fix it now...but I'll take a look and see what I think...

[PaceAdvantage]

Fisher from the FED just said markets have OVERSHOT and we are in for a correction...oh how I hope the market puts stock in those words...

I'll take a minor "irrational exuberance" moment...

[barn32]

Originally Posted by PaceAdvantage

Well, considering tomorrow is 20DTE, I think I'm going to take the loss...I personally think it's too dangerous and too late in the game to try and fix it now...but I'll take a look and see what I think...

You have to do of course what ever makes you comfortable.

Looking at your graph your downside has lots of protection. By adding verticals you will reduce your downside risk somewhat, but not that much--there is always a tradeoff.

With TOS can you close out the trade but still trade it on paper? In other words, manage the trade as if you were still in it to see how it would end up after doing a lot of adjustments?

[barn32]

Originally Posted by PaceAdvantage

Fisher from the FED just said markets have OVERSHOT and we are in for a correction...oh how I hope the market puts stock in those words...

I'll take a minor "irrational exuberance" moment...

This is simply my opinion and I could be very wrong, but I don't pay any attention to the news and I think we've already had our correction...Dec/Jan.

[PaceAdvantage]

TOS does have certain features that allow you to trade in the past, but I'm not sure how robust it is...I'll have to look into it...I do know their "OnDemand" feature takes a few days to add recent data...it's an interesting idea and I'll have to see, perhaps in a week or two, how things would have played out if I would hold onto this one...

[PaceAdvantage]

Just closed out the March trade for a loss -359.98:

Date	Time		Trade Description						Fees	Comm	Amount
1/30/15	11:02:59	BOT +3 BUTTERFLY RUT 100 MAR 15 1200/1150/1100 PUT @8.90 CBOE	-0.31	-18.99	-2,670.00
	11:04:30	BOT +3 IWM 100 MAR 15 116 CALL @4.08 CBOE			-0.08	-12.24	-1,224.00
2/12/15	15:42:46	SOLD -3 BUTTERFLY RUT 100 MAR 15 1200/1150/1100 PUT @6.50 CBOE	-0.31	-18.99	1,950.00
	15:43:34	BOT +3 BUTTERFLY RUT 100 MAR 15 1240/1190/1140 PUT @11.45 CBOE	-0.31	-18.99	-3,435.00
2/23/15	10:03:56	BOT +1 VERTICAL RUT 100 MAR 15 1190/1200 CALL @7.58 CBOE	-0.06	-11.49	-758.00
2/27/15	14:57:19	SOLD -1 VERTICAL RUT 100 MAR 15 1190/1200 CALL @8.50 CBOE	-0.06	-11.49	850.00
	15:38:08	SOLD -3 BUTTERFLY RUT 100 MAR 15 1240/1190/1140 PUT @9.65 CBOE	-0.31	-18.99	2,895.00
	15:38:23	SOLD -3 IWM 100 MAR 15 116 CALL @7.19 CBOE			-0.12	-12.24	2,157.00
											-------------------------
													-359.98

PaceAdvantage M3 Trading Tour 2015
_______________________________
January...+311.93
February..+755.51
March......-359.98
-----------------------
TotalYTD..+707.46

[PaceAdvantage]

And I opened my April trade today:

Date	Time		Trade Description						Fees	Comm	Amount
2/27/15	15:58:30	BOT +3 BUTTERFLY RUT 100 APR 15 1260/1210/1160 PUT @11.00 CBOE	-0.31	-18.99	-3,300.00
	15:58:53	BOT +4 IWM 100 APR 15 120 CALL @4.34 CBOE			-0.10	-12.99	-1,736.00

[barn32]

Originally Posted by PaceAdvantage

Just closed out the March trade for a loss -359.98:

I don't think I would have given up on your position. I went back and put it into OptionVue the way I would have traded it. Assuming Mar 20th expirations, and the prices wouldn't be exact of course, but as my delta got over 100, I would have added a 1 RUT vertical +1190/-1210 on or about the:

18th
23rd
24th
26th and
2nd of March

Even with the roll, doing so would put the position up ~$260 with a graph that looks like this:



The upper dashed line is the potential 9 days from now.
The position would still be up if the RUT had stayed flat today instead of being down around ten points.

Compare this to my Mar 20th M3, which is up around $430 right now, where I also had to do a roll and I added verticals on the:

23rd
24th
25th and
Mar 2nd




Of course you do have two other problems. One is that TOS doesn't give you nearly as good of analytical ability as OV, and the other is commissions. Adding lots of verticals, especially IWM verticals is expensive if you're paying a lot in commissions, which can make a person reluctant to do a trade.

One RUT vertical is much cheaper than nine IWM verticals, but with IB versus TOS there is a much bigger difference.

If I do a five lot IWM vertical spread in IB it costs around $3.50. I'm guessing it costs around $35 with TOS. I bought a 1 RUT vertical spread yesterday in one of my positions and the commission was .68¢.

[barn32]

I closed out (except for one vertical) my Mar 6 M3 that I opened on Feb 17. It had a 17 day expiration window.

I'm doing these weekly now. I skip over my monthly expiration date so as not to get too confused. I opened a Mar 27th trade today (24 DTE).

My days till expiration on these trades varies anywhere from 10 days to around three weeks.

As you can see by the first graph there wasn't too much more profit to be had unless the RUT sinks down pretty big in the next two days (upper dashed line), so I decided to exit with 3 days until expiration.

This trade had one roll.

If the RUT closes anywhere above 1219, I'll show a total profit of about $540. (Currently up $411.)

The second graph is the current position with just the vertical left open. (I put on this vertical yesterday, by the way.)

[PaceAdvantage]

Originally Posted by barn32

I don't think I would have given up on your position. I went back and put it into OptionVue the way I would have traded it. Assuming Mar 20th expirations, and the prices wouldn't be exact of course, but as my delta got over 100, I would have added a 1 RUT vertical +1190/-1210 on or about the:

18th
23rd
24th
26th and
2nd of March

Even with the roll, doing so would put the position up ~$260 with a graph that looks like this:



The upper dashed line is the potential 9 days from now.
The position would still be up if the RUT had stayed flat today instead of being down around ten points.

Compare this to my Mar 20th M3, which is up around $430 right now, where I also had to do a roll and I added verticals on the:

23rd
24th
25th and
Mar 2nd




Of course you do have two other problems. One is that TOS doesn't give you nearly as good of analytical ability as OV, and the other is commissions. Adding lots of verticals, especially IWM verticals is expensive if you're paying a lot in commissions, which can make a person reluctant to do a trade.

One RUT vertical is much cheaper than nine IWM verticals, but with IB versus TOS there is a much bigger difference.

If I do a five lot IWM vertical spread in IB it costs around $3.50. I'm guessing it costs around $35 with TOS. I bought a 1 RUT vertical spread yesterday in one of my positions and the commission was .68¢.

It's $9.99 + $.75 per contract...so not $35, but $17.49...still a ton more expensive...but not quite as much as you thought.

[PaceAdvantage]

My plan is to follow the rules more religiously from here on out. If Delta is going to close the day near 10 or over, I will buy verticals to push it down...no ifs ands or buts.

If price moves 10 pts past my upper long strike or 20 pts past my short strike near end of day, I roll.

I'm just going to blindly follow the rules for now and stop adding my interpretation, or my hopes and dreams...

[barn32]

One other thing that might be helpful. If your position is outside the right side of the tent drawing closer to expiration, even if you're close to a roll point, that's not necessarily a bad thing. In fact, it can be a very nice position to be in--and very profitable. It's yet to happen to me, but this month could be the first time.

It's the type of position you can just let expire if you like. Assuming you've properly adjusted, your upside loss is almost nonexistent and you should have lots of room to the downside.

But there is one thing John Locke advocates when your Delta is over 50 and you start to drift outside the right of the tent, and that is to adjust your Delta until it is back under 50. (And of course we are usually talking about a negative Delta.)

And as usual it can wait a day, which is part of the beauty of this trade. There is no real big rush to make adjustments, which is what I'm starting to realize albeit very slowly.

If your Delta is high and you have a positive Vega, and a vertical won't solve your problem, then it's probably time to just go ahead and roll. If you're very close to expiration with this problem, then bailing out might be the right play.

Adjust if your Delta is over 100 inside the tent and over 50 outside to the right of the tent.

(If you're outside to the left of the tent it's time to file for bankruptcy.)

[reckless]

I am truly envious of all you guys. I could never succeed doing what you guys do.

My question is this-- What is the reason why any position should be taken?

Thanks.

[barn32]

Originally Posted by reckless

I am truly envious of all you guys. I could never succeed doing what you guys do.

My question is this-- What is the reason why any position should be taken?

Thanks.

I'm not sure I completely understand your question, but if you're asking why you would even put on the trade in the first place my answer would be that you're trying to take advantage of time decay...namely your middle strike options.

If the position does absolutely nothing you'll make more money from the two options you sold than you'll lose from the two that you bought. If the position goes up or down slightly you'll win. If it starts moving strongly in one direction or the other, but not too quickly, you can adjust and still have enough time to come out ahead.

Sometimes the trade will just get away from you and you're sunk no matter what you do. For example, it could go up strongly and then down strongly and then up strongly. That's a bad scenario, but you're going to have some losing months. (This actually happened to me once, and I still managed to eek out a small profit.)

The M3 is a very forgiving trade, which for the most part is trying to remain Delta neutral. In other words, you're not that concerned with market direction. You're basically just reacting to market direction.

Not sure I answered your question. Just some thoughts.