The M3 Options Trading System

[PaceAdvantage]

My profit target is $500 and my stop loss is -$500 per lot.

[PaceAdvantage]

Finally posting a screenshot of the current January expiration trade...came very close to having to roll it up recently as the Russell flirted with 1190, but recent pullbacks have given me some room as of late...

[barn32]

I closed out the last of my two December M3 trades yesterday. I was short 5 puts as part of a vertical spread hedge and I was just waiting for them to expire. Profit wise, my P&L says I made $1400, but after subtracting for some adjustments I think I only made about $800 on the two spreads combined?

Why don't I know exactly? Good question. I spent an entire morning trying to piece together my trades and aligning them with OptionVue, but something was askew. So I think my estimate will have to make do.

(One problem is that when you are hedging with IWM you aren't able to make that distinction using OptionVue. You can't mix and match different contract types. So to adjust for that you multiply your RUT contracts by 10 (if you're doing a 1 lot) and just use one RUT call for your hedge. The numbers don't work out exactly the same (but it's close) and it's easy to mess up your Trading Log. I'm hoping ThinkorSwim doesn't have that limitation.)

I'm still not 100% up to speed with IB. OptionVue is raising their prices in January to $100 a month for IB customers (from $85). I opened a TD Ameritrade account so I could play around with ThinkorSwim to see if that could be a viable replacement for OptionVue, but I still haven't got around to figuring out how to use ThinkorSwim yet. (Yet another learning curve.)

My January M3 trade looked like this a couple of days ago before the run up and this was after a 30 point adjustment (which somehow gave me a $460 profit) while the market was tanking. A good looking M3. (One problem is that I mistakenly did a January 16 expiration instead of Jan 22, so I hope that doesn't come back to bite me later on. (Lesson? Be very careful that you are trading the right contracts! It's so easy to click the wrong buttons.)



This is what it looks like today. What a difference two days can make.



As you can see I'm well outside the tent in roll up territory. If I roll it up 40 points it will look like this:



There is no real hurry to roll. I can watch the market today and if it pulls back I can wait, but if it keeps rallying I'll just probably roll it up 40 points and be done with it. I'll probably have to do a delta hedge sooner or later as well and that can most likely be done with something like a 5 lot (IWM) 1140/1160 vertical spread. The delta hedge will also help to flatten out the T+0 line on the upside, because as you can see it is starting to take a bit of a dip. Any continued upward movement and I'll want to be prepared for that.

I just have to keep my eye on it and experiment around with some different numbers until I can get the greeks close to where I want them.

[PaceAdvantage]

I am sitting on the roll up point right now (1190)...my position is in the red by about $115 (not including commissions)...I will have to decide near the end of the day what I want to do...even if I do roll up, I have a feeling I'm going to be taken out again, and there isn't much time left in this trade (supposed to be out by next Friday at the latest, if I follow the rules).

[barn32]

Originally Posted by PaceAdvantage

I am sitting on the roll up point right now (1190)...my position is in the red by about $115 (not including commissions)...I will have to decide near the end of the day what I want to do...even if I do roll up, I have a feeling I'm going to be taken out again, and there isn't much time left in this trade (supposed to be out by next Friday at the latest, if I follow the rules).

If you roll, you'll still be down $115, but you will be in a much better position going forward.

The roll gives you 30-40 points of movement before you have to do something again, and with the choppy nature of the RUT it will probably go back and forth for a while rather than just straight up (or straight down), but that's just an opinion. One of the good things about this trade is that it is so forgiving. It takes some big moves to make you have to adjust.

Also, you can hold the trade closer to expiration. There is no reason you can't. You just might have to watch it a little more closely. I held my December trades into the last week. I should have got out the week before, but I got greedy, the market spiked down, and it cost me some profit.

So, if it were me, and I didn't plan on rolling, rather than gamble I might just exit right here and take the $115 loss. Rolling does give you the best opportunity to take some profit out of the trade, but you'll have to hold it for a while to make that happen...and as you pointed out a large spike upward (30-40 points?) will put you at yet another decision point.

Your choice.

[PaceAdvantage]

Actually, if I follow the rules...the rules state to roll up 20 points, yes?

Which means my upper long strike would become 1200 after the roll. And my new "roll up point" becomes 1210, which is only 20 points higher than the market right now...

With all that said, I agree with you...if the market is above my roll point by 3:30 today, I will look to roll up.

[barn32]

For the three people still following this thread, I rolled up my butterfly 50 points and added in a 6lot 119/121 vertical put bull spread and my position now looks like this: (My delta was still way too high so I bought one more 107 call)




This is what the position will look like in 7, 14, 21 and 28 days respectively if I can maintain the position between the two vertical dashed lines:

[barn32]

Originally Posted by PaceAdvantage

Actually, if I follow the rules...the rules state to roll up 20 points, yes?

True, but the "rules" are flexible. John Locke does all kinds of things that go against the "rules." Those original rules were designed for traders new to the concept and to make it as simple as possible.

But you have to do what you think is necessary to make the position look attractive while keeping your greeks in line.

I just rolled 50 points. (I don't like to take a position [long or short] with this type of trade, but I just can't help being somewhat bullish going forward.

Now am I doing the right thing? Do I know what I'm doing? Hell no. It's a giant guessing game in a sense. Lots of trial and error. Lots of mistakes.

But it is a great way to learn some things.

[barn32]

After adding in the extra 107 call the position now looks like this. I'm comfortable with this going into the weekend. My T+0 line is relatively flat and my delta is under 10.

So, we'll just have to wait and see what happens next.

[barn32]

Originally Posted by barn32

I rolled up my butterfly 50 points and added in a 6lot 119/121 vertical put bull spread...After adding in the extra 107 call the position now looks like this.

Actually, the position looks like this:



It just didn't make sense to me at the time that I had to add in those hedges, so I went through IB and OV and went over every trade and reconstructed things from the beginning.

Due to the fact that I bought some wrong contract months, (which I later corrected) and also because of a lagging issue with OptionVue, I mistakenly believed I had to hedge my delta with vertical calls and a 107 call to get things back in line.

It turns out of course that I didn't need those hedges.

So, as you can see, in actuality I am heavily tilted to the upside. Hopefully the markets open up on Monday morning so I can exit those hedges with a profit. Either way, if I simply get rid of them my position (after the 50 point roll) will then look like this, which makes a lot more sense.

[barn32]

My current position looked like this. My delta was -120, and the T+0 line was trending down.



To correct that I bought eight 122/120 IWM vertical put spreads. This lowered my delta to -14, and the position now looks like this. I'm currently +$77 in the trade.

[PaceAdvantage]

I rolled up like I said I would...but had to buy two IWM calls to get a decent graph and a decent delta....

Now of course, since I rolled up, the market continued to creep up, and I'm within 10-12 points of having to roll up again, which won't happen since we're almost at the 20 days till expiration point...this month might be the rare bust...we shall see...

I'm sure an "end of year rally" is certain to follow this "Santa Claus rally"...

[PaceAdvantage]

I'm still in my January trade, believe it or not...and I'm only $200 away from getting out at full profit (including the earlier roll-up loss + commissions). Fingers crossed...running out of time...but the graph sure is pretty today.

I'm also in the February trade, and as this is my first official opening position of 2015, I've increased my size to three lots....will be going for $1,500 profit per trade this year, up from $500 in 2014. Jan graph below...Feb graph in next post

[PaceAdvantage]

Feb graph

[barn32]

My earlier 50 point roll was a mistake, and I'm paying for it now. I just rolled up another 40 points, and I'm currently -$411 going into the last two weeks. (2 lots)

This is my third roll of the trade. Down, up down. Not a good scenario for this kind of position.