The RUT Bearish Butterfly

SMB TRAINING
OPTIONS TRAINING PROGRAM

Dealing With Large Up Moves

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 Position Size
 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.
Risk Management and Profit Targets
 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 decisions are made at 3:30 PM EDT. The daily range is ignored.
UNLESS the trade is over profit target or is under 7 DTE and we
choose to stay in the position.
 Trade Exits
 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,

the position will be monitored and adjusted as needed.
 Trade Set Up
May 2009 Expiration
 Date: March 20, 2009
 RUT Price: 403.35
 Entry Strikes: 380
 Purchase 10 – 330/380/430 Put Butterflies
 Control Point: 380
 Add Points: 420/440
 Roll Points: 450/460/470/480/500
 First Downside Adjustments: 340
 Entry Matrix
Buy 10 – 380 Put Butterflies
Entry Graph
Price Chart on Entry
 March 23, 2009
RUT is at 425, past our add point of 420
Add second 1/3 – Buy 10 - 400 butterflies
Graph Before Adjustment
Graph After Adjustment
 March 26, 2009
Delta/Theta is 1.58/1 and price is just under add point
of 440
 Options
 Because RUT is so close to the add point and did
exceed it intraday, we could add the last 1/3 here.

 Since we are using 3:30 PM data for our decisions

and RUT is under 440, we will do the roll instead of
adding.

 Either choice is fine and you will find that later in

the trade we will end up in the same position either
way.
Graph Before Adjustment
Remove 380 butterflies and roll to 420
New Delta Theta Ratio is 0.85/1
Graph After Adjustment
 April 2, 2009
7 days later
RUT blasts to 451- past our 440 add point
 Options
 Notice RUT has also exceeded our first roll point of
450. Because we already rolled before we added
the last 1/3 to the position and both our Delta and
Delta/Theta ratios are fine after adding the last
1/3, we will only add the last 1/3.

 Had we added the last 1/3 on March 26, RUT

exceeding 450 would have triggered a roll and we
would be in the same position as we will be once
this adjustment is made.
Price chart shows we are up 50
points in 12 days
Graph Before Adjustment
 Add last 1/3
Buy 10 - 440 butterflies
Graph After Adjustment
 April 9, 2009
7 days
RUT exceeds the next roll point of 460
Graph Before Adjustment
Price chart shows we are up 60+
points in 19 days
Roll the 400 butterflies to 460
Graph of new position
 April 16, 2009
7 days
RUT exceeds the next roll point of 470
Graph Before Adjustment
Roll the 420 butterflies to 480
Position is down -$5,200
Graph of new position
 April 17, 2009
1 day
RUT exceeds the next roll point of 480
Current Graph
BUT WAIT!
 We are allowed to roll at any time
past this point but….....
 The position Delta would be -39, which is less
than our -100 limit after the roll.

 Therefore we cannot make the roll right now.

 We could remove the lowest set of butterflies but

since total Delta prior to the roll is only
 -364 it makes more sense to do nothing.

 We may be able to make the roll when the price

runs up a little more or some time goes by.
 April 23, 2009
5 days
RUT down to 460
April 23, 2009
Price Chart
April 23, 2009
Graph
 April 24, 2009
RUT back up over 480 roll point but still cannot roll
Current Graph
 April 29, 2009
6 days
RUT has finally moved enough to roll the position
Current Graph
Roll 440 Butterflies to 500
Graph of new position
 May 4, 2009 – 5 days – 11 DTE
RUT at 501- Delta -770
Exceeded both the next roll point and maximum Delta
Current Graph
 Price Chart
RUT is up 100 points from entry
460 Butterflies are rolled to 520
Graph of New Position
 May 5, 2009
10 DTE
Still at 501- Down $2750
May 5, 2009
10 DTE
 May 6, 2009
9 DTE
Still at 501 – Down $400
May 6, 2009
9 DTE
 May 7, 2009
8 DTE
Price drops to 489 – Down $2360
May 7, 2009
8 DTE
 May 8, 2009
7 DTE
RUT is at 508 – Up $1590
May 8, 2009
7 DTE
 Taking The Trade Into Expiration
 It has been a very tough month on this “bearish”
trade.

 According to the core guidelines, the trade needs

to be exited today because it is the Friday before
expiration.

 More experienced traders who are willing to risk

losing the trade to make more and spend the time
monitoring the trade can bring this into expiration.
 May 2009
Situation

 Up $1500 when we hit the exit date.

 Am I willing to risk 10K to stay in?

Yes.

 Myexit point is when trade is down

$8500
May 2009 Expiration
May 8, 2009
7 DTE
May 8, 2009
7 DTE
Sell 3 480 butterflies to reduce Delta and achieve my
objective of withstanding a 15 point move in either
direction without exceeding -10k p/l
Graph of New Position
 May 11, 2009 – 4 DTE
3days
We are up $9,000 well over the 21 DTE profit target
Analyze Graph
 May 12, 2009 - 11:30 AM – 3 DTE
We are now tightly following expiration guidelines
Delta is +571
Add 3 480 Butterflies
New Delta 431
New Graph
May 12, 2009 - 12:30 PM
Delta is 674
Graph Before Adjustment
Remove 3 - 520 Butterflies
New Delta 417
New Position
May 12, 2009 – 1:00 PM
Delta is 614
Graph Before Adjustment
Remove 3 - 520 Butterflies
New Delta 403
Graph of New Position
May 13, 2009 – 10:00 AM – 2 DTE
Delta is 903
Graph Before Adjustment
Remove Remaining 520 Butterflies
Add 2 – 460 Butterflies
New Delta 440
Graph of New Position
May 13, 2009 – 11:00 AM
Delta is 543
Graph Before Adjustment
Add 2 – 460 Butterflies
New Delta 394
Graph of New Position
May 13, 2009 – 12:00 PM
Delta is 565
Graph Before Adjustment
Add 2 – 460 Butterflies
New Delta 419
Graph of New Position
May 13, 2009 – 1:00 PM
Delta is 650
Graph Before Adjustment
Add 3 – 460 Butterflies
New Delta 450
Graph of New Position
May 13, 2009 – 1:30 PM
Delta is 641
Profit $3966
Graph Before Adjustment
 Add 1 – 460 Butterfly
Remove 1 – 500 Butterfly
New Delta 494
Graph of New Position
Price Chart
 May 13, 2009 – 3:30 PM
Delta is over 250, Too High Going Into Close
Graph Before Adjustment
Remove 2 – 500 Butterflies
New Delta 263
Graph of New Position
Yesterday’s Graph
May 14, 2009 – 2:00 PM
Delta of -568
Graph Before Adjustment
Add 2 – 500 Butterflies
New Delta -386
Graph of New Position
 May 14, 2009
Decision Time
Would You Expire the Trade?
Analyze Graph
How About If We Do This?
Buy Back All 460 Puts
Buy 10 - 470 Puts
Sell 5 - 500 Puts
Graph After Adjustment
RUT would have settled around 479
Looks like we would have gotten
around $17,500
Price Chart