SMB TRAININGOPTIONS TRAINING PROGRAM

Dealing With Large Down Moves

The RUT Bearish Butterfly

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Disclaimer

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.

Position Size

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.

Risk Management and Profit Targets

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 Exits

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

Trade Set UpSeptember Expiration

Entry MatrixBuying 10 – 820 Butterflies

Entry Graph

Price Chart on Entry

August 1, 201110 Days

RUT has dropped 50 points to 791

Price Chart

Analyze Graph

August 2, 2011RUT drops to 774 below the 780 adjustment point

Analyze Graph Before Adjustment

Roll 820 Butterflies Down to 770 Butterflies

Graph After Adjustment

Control Point: 770

Add Points: 810/830

Roll Points: 840/850/860/870/890

Next Downside Adjustment: 730

New Control, Roll and Adjustment Points

August 4, 2011- 2 DaysRUT is at 734

Down over 100 points from entry

Price Chart

Analyze Graph

August 5, 2011RUT 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

Control Point: 710

Add Points: 750/770

Roll Points: 780/790/800/810/830

Next Downside Adjustment: 670

New Control, Roll and Adjustment Points

August 9, 2011- 4 DaysRUT at 664

Below 670 Adjustment Point

Graph Before Adjustment

Roll 710 Butterflies Down to 660 Butterflies

Graph of New Position

Price ChartRUT Down Almost 200 Points

Control Point: 660

Add Points: 700/720

Roll Points: 730/740/750/760/780

Next Downside Adjustment: 620

New Control, Roll and Adjustment Points

August 15, 2011- 6 Days LaterRUT 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 LaterRUT Hit Profit Target Intraday

August 22, 2011Analyze Graph

August 26, 2011 – 4 Days 21 DTE

August 26, 201121 DTE

Price Chart

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.

Taking The Trade Into Expiration

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 26, 2011

August 30, 2011Up over 30 points in 2 trading days

August 30, 2011 - 3:30 PM – 17 DTEI let trade go too far !!!

7 point up move knocks me out of the tradeWhat are our choices?

Price Graph

$1200 from max loss of -$300 **

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

Market is over bought

Situation

Best probability to win the trade without exceeding my

loss number of -$300

What do I want to achieve?

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.

What do I know?

Get out

Reduce size

Stay Put

**Look outside the box and do something different with as few moves as possible

Best Choices

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 - 3:306 Days – 4 DTE

Graph

September 13, 2011 - 3:30 PM – 3 DTEDelta is -348, Too High Going into Close

Graph Before Adjustment

Remove Verticals Remove 660 ButterfliesAdd 10 – 680 ButterfliesAdd 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 PMDelta is -546

Graph Before Adjustment

Buy 3 – 720 ButterfliesNew Delta -347

New Position

September 14, 2011 – 3:00 PMDelta is 807

Graph Before Adjustment

Buy 6 – 720 ButterfliesNew Delta -408

New Position

September 14, 2011 – 3:30 PMDelta is -871

Graph Before Adjustment

Sell 8 – 680 ButterfliesNew Delta -249

New Position

September 15, 2011 – 11:00 AM Expiration DayDelta is +617

Graph Before Adjustment

Buy 3 – 680 ButterfliesNew Delta +378

New Position

September 15, 2011Decision Time

Would You Expire the Trade?

Graph

Price ChartMarket 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