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Locke's Systems and the IWM

Discussion in 'Options' started by will, Nov 9, 2015.

  1. will

    will Well-Known Member

    Does anyone actually trade any of locke's systems on the IWM? I want to do a few practice trades with the m3 using the IWM, instead of going all out in the RUT right away. During backtesting though, with all the adjustments in a moving market, it seems that commissions get out of hand fairly quickly. Any thoughts? thanks.
  2. ACS

    ACS Well-Known Member

    I started to practice the Bearish Butterfly with IWM for a few months to get the mechanics down before moving to the RUT. The commissions are a killer but you are doing it for experience with limited monetary risk so consider it tuition.
  3. Several ways. Locke has suggestions for trading his strategies with less capital.
    For example: Use RUT for the butterfly and IWM call(s).
  4. will

    will Well-Known Member

    Thanks for the responses. I was only really planning on using small size for the mechanics. I was just checking to see if other people ran into the same issues with the commissions. I do have the m3 course where locke explains how to use smaller size, but he doesn't talk about commission much.
    He does mention assignment risk though. Ever run into assignment with the iwm? I'm thinking it should only be an issue close to expiration.
  5. Capt Hobbes

    Capt Hobbes Well-Known Member

    For BB, you can simply trade 1 RUT butterfly with all the guideline deltas divided by 10 (and delta/theta ratios unchanged, of course). That would be a $5K PC position with a $1,500 max loss. The only reason to go to IWM would be if you feel that's still too much.

    Locke describes two core ideas for mini M3s. One is 1 RUT butterfly plus 1 IWM call, with adjustment trades also done in IWM. There is a thread on these forums where Ron (GreenZone) described in detail how to model and do bookkeeping for those in OV. The other is M3 Unhedged, which is basically an unbalanced narrow condor in RUT where instead of a really flat delta your goal is not too much delta. All adjustments are done by moving the four options making up this condor, so you don't touch IWM at all, and the minimum size is 1 contract for $5k PC.

    I personally like a combo approach, where you start with 1 RUT butterfly and 1 IWM call like in M3, but then adjust only by moving the RUT strikes like in M3U. There is no assignment risk because all you ever have is a long call in IWM. There is a dividend hit, since the DITM call will lose value without any dividend to show for it, so before dividends you can drop the call and make it a real M3U at least temporarily.

    An issue with these mini positions is too much granularity closer to expiration, since every strike is just one option and you can only move a strike wholesale. A double size would be easier to manage.
    Venkat likes this.
  6. will

    will Well-Known Member

    Really appreciate the advice. Lots of good information.

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