SMB TRAINING OPTIONS TRAINING PROGRAM

The RUT Bearish Butterfly

1.       SMB TRAINING is NOT a Broker Dealer.  SMB TRAINING engages in trader education and training.  SMB TRAINING offers a number of products and services, both electronically (over the internet through Smbtraining.com) and in person.  Through Smbtraining.com, SMB TRAINING offers the “Virtual Trading Floor”, a community through which independent traders (subscribers), as well as T3 Trading Group, LLC traders, observe a virtual trading floor environment (as described below) for educational purposes.  SMB TRAINING also offers web-based, interactive training courses on demand.

2.       The seminars given by SMB TRAINING are for educational purposes only. This information neither is, nor should be construed, as an offer, or a solicitation of an offer, to buy or sell securities. You shall be fully responsible for any investment decisions you make, and such decisions will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.

3.       This material is being provided to you for educational purposes only. No information presented constitutes a recommendation by SMB TRAINING or its affiliates to buy, sell or hold any security, financial product or instrument discussed therein or to engage in any specific investment strategy. The content neither is, nor should be construed as, an offer, or a solicitation of an offer, to buy, sell, or hold any securities. You are fully responsible for any investment decisions you make. Such decisions should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance and liquidity needs.

4.       SMB Training and SMB Capital Management, LLC are separate but affiliated companies. 5.       T3 Trading Group, LLC is a Registered SEC Broker-Dealer and Member of the CBOE Stock Exchange

(CBSX www.CBOE.com). All trading conducted by contributors on Virtual Trading Floor is done through T3 Trading Group, LLC.6. Any information contained in this presentation is for educational purposes ONLY. Neither Locke In Your Success, LLC, John Locke nor it’s subsidiaries nor any of their respective officers, employees, representatives, agents or independent contractors are, in such capacities, licensed financial advisors, registered investment advisors or registered broker dealers. Neither do they provide investment nor financial advice nor make investment recommendations, nor are they in the business of transacting trades. Nothing in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer (buy or sell) by Locke In Your Success, LLC, or others described above, of any particular security, transaction or investment.

7. The risk of loss in trading securities, options, futures and forex can be substantial. Customers must consider all relevant risk factors, including their own personal financial situation, before trading. Options involve risk and are not suitable for all investors. See the Options Disclosure Document: Characteristics and Risks of Standardized Options. Trading foreign exchange on margin carries a high level of risk, as well as its own unique risk factors. Please read the following risk disclosure before considering the trading of this product: Forex Risk Disclosure. Futures and forex accounts are not protected by the Securities Investor Protection Corporation (SIPC).

Disclaimer

The RUT bearish butterfly is a trading system that is designed to make as much money as possible with the smallest possible exposure to the market. It starts out with a small amount of capital as a bearishly positioned butterfly with the position size increasing only if the market rises.

The trade typically has a greater range than a wide iron condor with a much higher profit potential.

The trade sometimes has “bonus” months where you can make well past profit target.

Description

Entry – 1/3 Position

2/3 Position

Fully Scaled In

The Bearish Butterfly:

Works the best in volatile, choppy, down trending markets and does very well in sideways markets and choppy up trending markets.

Is most risky to trade and can difficult to manage in smooth, strong up trending markets but it usually works.

Normally has a range of up to 150 – 300+ points on the downside and up to 60 – 120 points to the upside, depending on the timing of the moves, before maximum loss number are hit. This range can be drastically reduced however in unfavorable market conditions ( IE. An abnormally low implied volatility environment), late in the trade or if a whipsaw occurs.

Description

The trade starts out approximately 56 days prior to expiration by entering 1/3 of the position as a butterfly with 50 point wings.

The trade is entered negative Delta with the short strikes approximately 20 points below the current market price.

The trade is scaled into as the price goes up, and follows the market while increasing position size.

Description

The initial “core guidelines” are a starting point for learning the trade and they work very well.

Once you’ve mastered the core guidelines, you can take steps to get more out of the trade which will be discussed later in the course.

Guidelines may seem complex at first but are really straight forward if learned one step at a time.

Core Guidelines

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 ratios and remain the same regardless of position size.

Core Guidelines

“Planned Capital” IS a fixed number that we use to base our risk management numbers off of and is a reasonable representation of the maximum amount of capital we are likely to have in the trade during an average month.

“Planned Capital” is NOT the maximum amount allowed in the trade.

In low volatility months with large price moves or if trading into expiration, your capital may substantially exceed the planned amount.

Trades with escalating capital cannot be properly managed with profits and losses based off of a percentage of a variable number because scaling trades almost always have substantially more money in them when they win lose than they do when they win.

We must use a planned, fixed number in order to properly manage the trade.

Planned Capital

Total Delta – Is the position Delta number at any given time.

Delta / Theta Ratio – Is the total Delta divided by the Theta number at any given time over 1. It is expressed as x.x Delta/1 Theta.

Note: Throughout this course, when we state that Delta, Theta or Delta/Theta ratios cannot exceed a given number, we are referring to the “absolute value” of that number. For example, if we state Delta cannot be greater than

(-100) we mean (-101) is a problem, NOT (-99). If we state that Delta cannot be greater than 100, we mean more than 100 as in +101 is a problem but also more than (-100) as in (-101) is a problem.

Total Delta and Delta / Theta Ratio

Planned Capital - $50,000

Minimum Capital Required in Account - $100,000

Profit Target - $15,000

Reduced Profit Target 21 DTE - $5,000

Max Loss - $15,000

All data in the course is based off of back test results during the period from 11/25/05 thru 9/15/11 while strictly following the core guidelines . All decisions, entries, exits and adjustments are made at 3:30 PM EDT. The daily range is ignored, except where noted.

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.

Trade Exits

The trade is entered in thirds with the first 1/3 being entered 56 days prior to expiration.

Entry first 1/3: Buy 10 put butterflies, OR sell iron butterflies, with 50 point wings 15-25 points below RUT price. We will use put butterflies.

Entry first 1/3 modification: If the Delta/Theta ratio is greater than 1.5/1, enter the market 10 points closer to the RUT price than normal.

Trade Entry

Check Delta/Theta Ratio to be sure its absolute value is under 1.5/1

-84.74/91.35 over 1 = -0.92/1 Delta/Theta so the entry is OK.

Graph on Entry

Once the position is entered, we will use the short or center strikes of the entry butterflies as an initial reference point to determine when we can take certain actions during the trade.

If at any point during the trade we have butterflies with the short strikes at a lower value than the entry butterflies, the reference point will be moved to the lower strikes.

The reference or control point is always the short or center strikes lowest butterflies that were entered at any time during the trade.

Reference or Control Point

In this case the initial reference point is 460. If this butterfly is rolled down, the reference point will be

lowered but the it will not be raised, even if the butterfly is moved up.

The “basic” scale in strategy from here is to add when the market exceeds 40 points over the reference point and then again when the market exceeds 60 points over the reference point. From there, if the market exceeds 70 points past the reference point, you may begin your rolling sequence depending on specific conditions.

For the purposes of this program, the reference point is the short strikes of the lowest positioned butterfly that was present at any time during the duration of the trade.

Scale in Strategy

Strictly from a point basis, this trade is scaled into or adjusted to the upside as follows:

Reference point +40 – add second 1/3 Reference point +60 – add last 1/3 Reference point + 70 – roll lowest butterfly +60 Reference point + 80 – roll lowest butterfly +60 Reference point + 90 – roll lowest butterfly +60 Reference point + 100 - roll lowest butterfly +60 Reference point + 120 - roll lowest butterfly +60 Reference point + 140 - roll lowest butterfly +60

Price points that must be exceed in order to take the listed action

Entry and Adjustment Points

Once you choose your entry short strikes, make note of those strikes as your reference point and record the price points where you are allowed to enter your second and last thirds of the trade as well as your roll points.

For example, if you enter the first 1/3 the trade with 460 short strikes, your 2/3 would be entered when RUT exceeds 500 and your 3/3 would be entered would be entered when RUT exceeds 520 and your rolls would start when RUT exceeds 530 with subsequent rolls at 540, 550, 560, 580 and 600.

The position size will be increased only if the add point is exceeded.

Record Your Reference Point

A large enough down move occurs that the initial butterfly was repositioned at a lower strike in which case, you would look at the short strike of your lowest butterfly and reset the reference point.

In rare cases, discussed later, where the market implied volatility is exceptionally low or you are very close to expiration and the 2/3 is “needed” in order to “safely” deal with the range.

You are trading the variation of the plan that allows adding to the

position on a down side move. This “core” version of the plan does not allow you to add to the position due to a down move except under the rare circumstances described above.

In This Example, if the market does not exceed the add point of 500, the second third of the position will not be entered except under three conditions:

When RUT price rises to 40 points above the reference point, add 10 put or iron butterflies 50 point wings 20 points over the existing butterflies.

Entry - The Second Third

Entry of Second 1/3

When RUT price rises to 60 points above the reference point, add 10 put or iron butterflies 50 point wings 20 points over the highest butterflies.

Entry - The Last Third

Entry of Final Third

Maximum Delta with 1/3 position is 250

Maximum Delta with 2/3 position is 500

Maximum Delta with 3/3 position is 750

Maximum Delta/Theta Ratio is 1.5/1

When these values are exceeded, the position will be adjusted assuming specific price point criteria are met

Delta and Theta Adjustments

RUT price is less than 40 points over the reference point.

Roll the butterfly 20 points up IF:

1. Delta exceeds -250… AND… price is more than 20 points above the short strikes of the butterflies.

2. The Delta / Theta ratio is greater than 1.5/1 … AND… price is more than 20 points above the short strikes of the butterflies.

Position ManagementUpside When Position Consists of 1/3

Position has exceeded maximum Delta/Theta Ratio and is higher than 20 points from the short strikes and is below 40

points over the reference point. The position needs to be rolled up 20 points.

Graph Before Adjustment

Move the 460 Butterflies to 480Delta/Theta ratio is now 0.87/1

Graph After Adjustment

Roll the butterflies back to the closest ATM strike IF:

1. RUT price exceeds 40 points below the short strike.

2. The Delta/Theta ratio is greater than 1.5/1 ..AND.. price is outside the expiration break even at the point where the break even crosses the 0 profit.

3. The Delta exceeds 250 …AND.. price is outside the expiration break even at the point where the break even crosses 0 profit.

Remember to reset your reference point!

Position ManagementDownside When Position Consists of 1/3

RUT price exceeded 40 points below the short strike.

The trade needs to be adjusted.

Graph Before Adjustment

Butterflies are rolled back to ATM

Graph After Adjustment

RUT price is less than 60 points over the reference point.

Roll the lowest butterflies up 40 points IF:

1. Delta exceeds -500 ..AND… price is more than 10 points past the short strike of the upper butterflies but less than 60 points from the reference point.

2. Delta Theta ratio is greater than 1.5/1 ..AND... price is more than 10 points past the short strike of the upper butterflies but less than 60 points from the reference point.

Position ManagementUpside When Position Consists of 2/3

Delta Theta ratio is greater than 1.5/1 ..AND... price is more than 10 points past the short strike of the upper butterflies

but less than 60 points from the reference point

Graph Before Adjustment

Original butterflies were rolled up 40 points

Graph After Adjustment

Remove higher strike butterfly and trade with 1/3 position IF:

1. Delta exceeds 500.

2. Delta / Theta ratio is greater than 1.5/1.

3. The price is outside the expiration break even at the point where the break even crosses 0 profit.

Position ManagementDownside When Position Consists of 2/3

Delta/Theta ratio is greater than 1.5/1

Graph Before Adjustment

The upper butterflies were removed

Delta/Theta ratio is now corrected

Graph After Adjustment

From here you may adjust to the upside because of two reasons:

If maximum Delta numbers are exceeded.

If the roll point values from the reference point are hit.

Position ManagementUpside When Position is Fully Entered

Adjusting due to Delta numbers being exceeded:

Roll lowest butterfly forward 60 points IF:

1. Delta exceeds -750… AND… price is past the short strike of the upper butterflies.

2. Delta Theta ratio is greater than 1.5/1 ..AND.. price is past the short strike of the upper butterflies.

Remove the lowest positioned butterflies and wait till price exceeds the short strike of upper butterflies to complete the roll IF:

1. If Delta the above Delta numbers are exceeded and the price is

NOT past the short strike of the upper butterflies.

Position ManagementUpside When Position is Fully Entered

Roll the lowest butterflies up 60 points

Remove the lowest butterflies

Adjusting due the point values from the reference point being hit:

Use the chart below:

Reference point + 70 – roll lowest butterfly +60 Reference point + 80 – roll lowest butterfly +60 Reference point + 90 – roll lowest butterfly +60 Reference point + 100 - roll lowest butterfly +60 Reference point + 120 - roll lowest butterfly +60 Reference point + 140 - roll lowest butterfly +60

Position ManagementUpside When Position is Fully Entered

If you adjust the position for either reason, before making the adjustment, check to see if:

The position Delta will be under - 100 after the roll.

If Delta / Theta ratio is still greater than 1.5 / 1 or -750 Delta after the roll.

If you removed the lowest butterflies, check to see if the remaining position is greater than 1.5 / 1 or -500 Delta.

Position ManagementUpside When Position is Fully Entered

If the position will be under –100 Delta after the roll.

Remove the lowest butterfly instead of rolling and recheck your Delta/Theta ratio to see if the remaining position is greater than 1.5/1 or -500 Delta.

If, the remaining position is greater than 1.5/1 or -500 Delta, check if you can roll the lowest butterflies up 40 points without going under -100 Delta/Theta ratio, if not, look at removing the “new” lowest butterflies instead of rolling.

 

Position ManagementUpside When Position is Fully Entered

Analyze the roll and make sure Delta is still over -100If it is not, just remove the lower butterflies and

recheck for your maximum number for 2/3 position

If Delta / Theta ratio is still greater than 1.5 / 1 or -750 Delta after the roll.

Perform a double roll and move the butterfly up 60 points from its position as well and check to see if you have gone under (-) 100 Delta.

If so, remove the “new” lowest butterflies and recheck your Delta and Delta/Theta ratio.

Position ManagementUpside When Position is Fully Entered

We analyzed the roll and Delta is still too high so we need to look at completing this roll and then rolling the 460

butterflies as well. Then we need to recheck the numbers.

Remove the highest butterfly and trade with two thirds of the position:

1. If Delta exceeds +750.

2. If the Delta Theta ratio is greater than 1.5/1.

3. If the price is below the short strikes of the lowest butterflies… AND... Delta/Theta ratio is higher than 0.75/1.

4. If the price is $20 below the short strikes of the lowest butterflies, remove the highest price butterfly regardless of the Delta / Theta ratio.

Position ManagementDownside When Position is Fully Entered

Both the price point and Delta/Theta ratio have been exceeded therefore we will remove the 520 butterflies, treat this as 2/3 position size and recheck our numbers