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Adjusted profit targets for M3 and BB

Discussion in 'Options' started by Capt Hobbes, Jul 22, 2015.

  1. Capt Hobbes

    Capt Hobbes Well-Known Member

    I'm wondering if anyone experimented with adjusting the "classic" M3 and BB rules/guidelines for profit targets. Here are some things I've been thinking about.

    BB target is a whopping 30% of planned capital bumped down to 10% at 21 DTE. In backtests I've seen a few cases when a trade was close to the high target, only to give all of it away by 21 DTE when capturing that "not large enough" profit would be allowed. Would a gradual phaseout of the target over a couple of weeks make sense instead? So that from, say, 35 DTE we start bringing it down every day to become 10% at 21 DTE.

    In M3 videos Locke was talking about reducing the target if BF/call ratio is reduced. However, with BB the target is the same no matter if we are in 1/3, 2/3, or a full position. Would it make sense to account for fewer butterflies with a lower target?

    If the trade is timed and entered closer to expiration than the classic 56 days, there is less time for the theta to work. Would it make sense to revise the targets down in this case?
    Gail likes this.
  2. Kevin Lee

    Kevin Lee Well-Known Member

    My two cents : I have shifted my view on profit target over time. For me, profit target is only a loose guideline. I will exit the trade when risk/reward is no longer in my favor and no adjustment is possible. That means when the risk/reward is still in my favor, I will not exit even though my profit target is reached. So, I don't change my profit target over time. It doesn't play a major role in my exit decision.

    Nevertheless, when it's nearer to expiration, it might get harder to find good adjustments or better risk/reward is available in the next month. Therefore, the chances of exit increase and in a sense it achieves the same result as bringing down profit target as you suggested. The difference is exit is still guided by risk/reward rather than a fixed percentage. I do have a time exit though because I cannot watch the trade full day and hence I want to avoid the high gamma in low DTE.

    However, max loss is a different story. I will exit when max loss is reached. This is more for discipline and preservation of capital.
    Gail, ccc, Venkat and 1 other person like this.
  3. Challenger

    Challenger Member

    I would also consider exit opportunities in this equation. Every time the dot is on top of the hill (along the T+0 line) I assess an early exit opportunity even if there is still plenty of time to expiration and even if the profit target has not been reached.

    Another exit opportunity would be at support or resistance. As an example, I may be in a Bearish Butterfly and the RUT falls to a support area and is forming a hammer (or other reversal candle pattern). When I see this, I need to ask myself how the trade will react on a strong bounce and decide if I will take profits or not (or convert the Bearish Butterfly to an M3).

    I agree with your comment above; if a Bearish Butterfly is not fully scaled in, I would certainly consider reducing the profit target.
    RayM likes this.
  4. Bhaskar

    Bhaskar Guest

    I have q question for Kevin Lee. Once you suggested that you tweak M3 trade ( that require less adjustment) because of work commitments. Please could you initiate a trade and post a screen shot/video…. As I am new and getting confused…many thanks
  5. Kevin Lee

    Kevin Lee Well-Known Member

    Hi Bhaskar,

    Not sure which conversation you're referring to, but I'm guessing it's about the fact that I am based in Singapore, due to the time difference, I am not able to monitor my trade after a certain time. As a result, I only do low-gamma strategies and do not get too close to expiration. So I usually start to peel off my position between 21 to 14 DTE. Is that what you're referring to ?
  6. Bhaskar

    Bhaskar Guest

    Hi Kevin, thank you for the reply.... i accidentally asked you that question ( as i could not find the thread in the forum i was following and as i am new, i get lost frequently in the maze) , instead of asking to Brian about that question of selecting strikes in a M3/BBF trade, whom i now wrote. Many thanks again for taking trouble in helping .
  7. Al G.

    Al G. Well-Known Member

    Hello Kevin,

    Can you please expand on "I will exit the trade when risk/reward is no longer in my favor". Do you have a general rule of thumb to determine what risk/reward is acceptable.

    Thank you
  8. Kevin Lee

    Kevin Lee Well-Known Member

    Hi Al,

    As I'm not able to monitor the market constantly, gamma/delta risk is the most important to me. I'll check what's my risk if the market moves 1 to 1.5 daily SD. If it's too big, I'll adjust to flatten the curve.

    Then I check how much am I paid in exchange for the risk of staying in. That's the Theta/Delta ratio - John Locke recommended 1:1 minimum. I usually go for 1.5 or 2 to 1.

    There are other things that I check but those are minor.
    Rick and RayM like this.

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