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Old 09-18-2014, 08:37 PM   #1
barn32
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The M3 Options Trading System

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Originally Posted by Pace Advantage
I used to be like that...then I started trading options...I like it better this way...one trade a month (unless I have to "adjust")....
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Originally Posted by Barn32
Are you selling puts?
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Originally Posted by Pace Advantage
Actually, long put RUT butterflies (Russell 2000 index), hedged with IWM (Russell ETF) calls...

You can read/watch more about what I'm currently doing here:

http://www.smbtraining.com/overview/m3
Well, I haven't quite watched all of the video, but so far I've only understood about 20% of it.

To fully get it I'm going to have to take a refresher course on the "greeks" and the butterfly spread.

But right off the top I have two questions:

1. In the video example trade he did an awful lot of adjusting, which generates a lot of commisions? No?

2. Is your loss on this trade capped out at 5K, or with all of the "adjusting" can you blow past that number if bad things happen?
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Old 09-19-2014, 01:26 PM   #2
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I understand it like this:

You should have $5000 for every "one" of these you want to trade. It generally costs me less than $2000 to get into the trade if you get in when he says to get in (about 50 days away from expiration). The closer you get to expiration, the more expensive these become.

The rest is in reserve in case you have to adjust.

No, one would never lose the entire $5000 (per butterfly), and I doubt very much if you'd even ever have $5,000 at risk (again, per butterfly...). Like I said, usually, I have less than $2,000 at risk at any time (per butterfly spread).

Plus, the rules state you are to look to exit the trade if you are down $500 or more, and you look to exit the trade if you are up $500 or more. You are also to exit the trade if there are only 20 days to expiration or less....if you were trading more than one butterfly spread (say you had $20,000 and you were trading 4 of these each time, then you would look to exit with either a $2,000 loss or $2,000 profit).

I have never had to make more than one adjustment thus far, and I've been trading these since around January....

This is a rather boring and slow way to trade...it's not something you have to monitor throughout the day...maybe take a look once at the start of the day and once at the end...they say you've made it as a trader once things get boring...

Last edited by PaceAdvantage; 09-19-2014 at 01:28 PM.
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Old 09-19-2014, 01:41 PM   #3
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And yes, if you don't know much about options, or if it's been a very long time, it's all going to sound quite foreign in that video...I haven't been trading options all that long (a couple of years), and even I was a little confused watching the video...
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Old 09-20-2014, 08:23 AM   #4
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Quote:
Originally Posted by PaceAdvantage
And yes, if you don't know much about options, or if it's been a very long time, it's all going to sound quite foreign in that video...I haven't been trading options all that long (a couple of years), and even I was a little confused watching the video...
This is why I think much of option trading will be replaced by specialized ETF trading.

Options are too damn confusing.
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Old 09-20-2014, 08:36 AM   #5
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The guys @ SMB seem to know their stuff at least. Options can be very tricky with all of the things you can do with them.
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Old 09-21-2014, 02:14 AM   #6
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Quote:
Originally Posted by badcompany
This is why I think much of option trading will be replaced by specialized ETF trading.

Options are too damn confusing.
Options trading volume has been going nowhere but UP...

http://www.businessinsider.com/goldm...me-went-2013-2

"Goldman Sachs options strategists Krag Gregory and Jose Gonzalo Rangel have the details:

The pace in 2013 has been even more remarkable for VIX options where the year-to-date average daily volume is running at a record high of 614,658 contracts – that is 1.4x the 2012 average and 22.4x the 2006 average.

VIX options had a record setting January: A breakdown of average daily volume by calendar month shows that VIX option average daily volume recorded an all-time high in January 2013 while S&P 500 options were in their 90th percentile relative to a 10-year history."

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Old 09-21-2014, 11:38 AM   #7
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From a volume standpoint, I can't argue.

Do you think a significant % is retail, or is it primarily the banks and funds hedging?
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Old 09-21-2014, 11:50 AM   #8
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I think retail investors have definitely become more comfortable with options in the last 5-10 years...the emergence of tastytrade and the acquisition of thinkorswim by TDAmeritrade hasn't hurt...that's how I become fully exposed initially, to the world of options...I've always been curious but was also always too intimidated to give it a go..
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Old 09-21-2014, 08:32 PM   #9
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Quote:
Originally Posted by badcompany
From a volume standpoint, I can't argue.

Do you think a significant % is retail, or is it primarily the banks and funds hedging?
The SPY weekly options have drained most of the volume from the big S&P. The volume is enormous. The spread between bid and ask is pennies, and the premium is relatively small. Yes, the retail guy is in there trading.

Often you can get 10-1 on a Friday if you are correct.

IMO, no need to get into the sophisticated strategies. I just bet on the put or call.
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Old 09-22-2014, 09:08 PM   #10
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A couple more questions:

1. It sounds like he's saying, "The T + zero line." Am I hearing him right. What is that.

2. What trading platform is he using to generate his charts. TradeStation? OptionVue?

3. Am I correct in assuming the trade starts out as a straightforward Put (or call) Butterfly spread? (He seemed to prefer doing these trades with puts for various reasons.) [Sell two at the money puts and buy two puts one in the money and one out of the money equal distances from the at the money strike.]
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Old 09-22-2014, 09:12 PM   #11
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Quote:
Originally Posted by Tape Reader
The SPY weekly options have drained most of the volume from the big S&P. The volume is enormous. The spread between bid and ask is pennies, and the premium is relatively small. Yes, the retail guy is in there trading.

Often you can get 10-1 on a Friday if you are correct.
10-1 on what? Volume? ??
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Old 09-22-2014, 11:23 PM   #12
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Originally Posted by barn32
10-1 on what? Volume? ??
Let’s watch and see. On Friday, we will watch if the high and low on options expiring on that day have a high and low that is equivalent to 10-1.

Volume? One can easily buy hundreds of out of the money options, with hours/minutes to expiration. This is betting, not investing.
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Old 09-23-2014, 01:56 PM   #13
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3. Am I correct in assuming the trade starts out as a straightforward Put (or call) Butterfly spread? (He seemed to prefer doing these trades with puts for various reasons.) [Sell two at the money puts and buy two puts one in the money and one out of the money equal distances from the at the money strike.]
Well, I see now after further viewing he starts out with a bearishly positoned Iron Butterfly.

I googled Iron Butterfly and came up with

In-A-Gadda-Da-Vida

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Old 09-23-2014, 02:10 PM   #14
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1) I think you are hearing him right. I'm not sure what he means by that either...I thought T+ refers to settlement date of options. I thought he was just referring to the current P&L line which to me is the curved line in those graphs...I'm sure I'm interpreting this all wrong, but that line does represent the current P&L of the trade along various price points.

2) Not sure of the platform, but it's not tradestation. It might be OptionVue...it's one of the more expensive ones I believe

3) It's not a bearish trade. In fact, it starts out as a delta neutral trade, because after you purchase the put butterfly spread, you're supposed to purchase stock or calls to bring the delta to zero. Thus, you are protected a bit to the long side (due to the stock/calls purchased) in case of a big run up shortly after you put the trade on, plus you have a lot of downside to work with because the butterfly itself is a bearish-type trade...so even though the butterfly spread alone is a bearish trade, when combined with stock or calls, it brings it to a neutral trade in terms of delta.

Again, I'm sure I'm butchering the terminology here...I'm still no expert when it comes to trading options...I just know enough to do a little damage...

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Old 09-23-2014, 06:58 PM   #15
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Originally Posted by PaceAdvantage
3) It's not a bearish trade. In fact, it starts out as a delta neutral trade, because after you purchase the put butterfly spread, you're supposed to purchase stock or calls to bring the delta to zero. Thus, you are protected a bit to the long side (due to the stock/calls purchased) in case of a big run up shortly after you put the trade on, plus you have a lot of downside to work with because the butterfly itself is a bearish-type trade...so even though the butterfly spread alone is a bearish trade, when combined with stock or calls, it brings it to a neutral trade in terms of delta.
OK, having been out of the game for a while, I'm having to go back to school. I wrote a simple spreadsheet to analyze the possible positions you might take according to his entry rules. With the RUT closing at 1120 today these are the numbers.

Strike Put/Call Lots Debit/Credit
1050 $14.70 1 -$1470
1100 $28.10 -1 $2810
1100 $41.70 -1 $4170
1150 $23.50 1 -$2350

Bottom line is that it generates a $3160 credit with a maximum loss of $1840.

1. Does the iron butterfly always generate a credit to begin with?
2. If I've done things right, the next step is to buy some IWM stock. What is IWM stock, is that a Russel Index fund? How much do you buy?
3. Then he says instead of using IWM stock he (buys?) deep in the money calls. Are these RUT calls? How deep in the money? How many?

I guess the numbers I'm showing are not delta neutral. You have to make that first hedge with the stock or the calls to get to that delta neutral point.

Am I on base with all of this?
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