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M3 RUT Mar 16

Discussion in 'Options' started by SVL, Jan 27, 2016.

  1. SVL

    SVL Well-Known Member

    Hello everyone !
    I am new to a market neutral trading and I have studied M3 strategy for last couple of weeks.
    I watched several times John Lock's presentations on YouTube . I found especially helpful his presentation to SMB group in July 2012.
    M3 RUT Apr 15 thread on CD member's forum started by Brian Larson was also very helpful.
    After back-trading T-logs of 5 demo trades which I downloaded from JL's web site , I decided to take a plunge and opened today my first M3 live trade with about $10000 capital. Initially I wanted to go with $5000 and only with IWM instead of RUT. But at the last moment decided to go with 5 RUT butterflies 1030P/980P/930P and 5 IWM90C.
    In order to track it correctly in Option Vue, I had to enter 10 multiples of my trade for puts and use 5 RUT 910 calls in lieu of 5 90 IWM calls ( with similar 82 delta).
    Here are my today's trades and Matrix and Analyze graph as of close on Jan 27, 2016.
    I plan to post updates on my adjustments as they occur .
    Any advice from anyone who trades M3 for living is greatly appreciated.
    Thanks in advance.
    P.S. Enormous thanks to Ron Bertino, Kevin Lee and Brian Larson for sharing their extensive knowledge with other members of this forum.

    Attached Files:

    Samer11 likes this.
  2. status1

    status1 Well-Known Member

    I am no expert but I think there are a few things wrong with that trade
    I believe the idea is to start off with a flat T+0 line and yours looks like it's already leaning to one side That may be ok if you are doing a directional trade and are expecting Rut to go higher
    The call should be near the right leg not deep in the money
    For $10k capital I think you have too many contracts open There is not much room for adjustment unless your adjustment is to close the trade and open a new one with whatever you have left of your capital
    Also if I am not mistaken the ratio of RUT to IWM should be something like 10 to 1 or 2 not 5 to 5
    If I were you I would take this trade off tomorrow and review the videos again and try to paper trade it first to get a better understanding of how the trade should be set up before you go all in with real money
  3. SVL

    SVL Well-Known Member

    Status1, Thanks for your advise. I knew it would be confusing as I entered this trade in half of normal size recommended by JL.
    I have 5 RUT put butterflies and 5 IWM deep in the money calls. 5 IWM calls are equivalent of 0.5 RUT call with the same delta.
    As you can not enter fraction of RUT put or call in Option Vue, I had to multiply all entered position by 10 times.
    Only in this case I could have the accurate Greeks and T+0 line for a combined position of 5 IWM calls and 5 RUT put butterflies in the same matrix.
  4. Capt Hobbes

    Capt Hobbes Well-Known Member

    First of all, as status1 said, this trade is far too big for a $10k account. 5 contracts require $25k in planned capital per JL's guidelines, and would be appropriate for an about $50k account.

    The biggest issue with the trade itself is that it's not really an M3 because it's not properly balanced. Translated to the standard 10-lot, it has about +30 delta, while what you want on entry is just slightly negative. To be fair, today's market conditions and options pricing are unusual, and this is why you ended up with something like this even though you placed your strikes the way JL does in the demos. Today the butterflies have lower delta than usual (-50 for a 10 lot), so a typical 80ish delta call is too much. There are multiple ways to deal with this.

    You could alter the butterfly-to-call ratio. In the standard RUT-only M3 you could buy more butterflies to bring their combined delta closer to -80, or in your RUT/IWM mix you could buy fewer calls.

    You could move the call up to reduce the delta -- not ideal, at least for the long term, because it would bring in a lot of negative theta.

    You could move some butterfly strikes around to tweak the delta. This last possibility is a good choice if you are trading a single lot (1 RUT butterfly and 1 IWM call, with no way to tweak their ratio). Here is an example of this last approach. Compared to yours, the lower strike of the butterfly is raised 10 points to increase negative delta, and the call is moved up a little to balance out. This nice t+0 would probably sag very soon and need adjusting though, if the conditions become more normal.

    m3 example.PNG

    A good start would be to close those trades and backtrade a few years' worth of history in OV -- say, 2012 to present, and then trade one lot live for a few months.
  5. SVL

    SVL Well-Known Member

    Capt. Hobbes,

    Many thanks for your suggestions and input.

    I have a larger account than $10000 and will allocate $25000 for this trade as per M3 general guidelines.
    Max loss - $2500 ( 10 % on allocated capital)
    Profit target - $ 2500 ( 10 % on allocated capital) but most likely will exit after $1500 actual profit.

    For Option Vue matrix only:
    Max loss is $25,000 ( 10 % on allocated capital)
    Profit target is $ 15,000 ( 6 % on allocated capital).

    Adjustment points for Option Vue matrix only:
    The desired Greeks for my position size of 5 RUT calls:
    Delta: Ideally +/‐ 250
    Acceptable +250 to ‐500
    Delta may exceed this range with favorable Gamma trend
    Gamma: (+) is good / (‐) is bad

    1/28/16 15:49 adjustment
    I bought bear put spread +2 980P/ –2 960PT to flatten T+0 line and bring delta down .
    The T+0 line should now please any M3 trader's eye.

    Full disclosure:
    I haven’t bought JL course but watched a lot of JL videos on YouTube during last 2 weeks.
    I followed the recommendation of vega4mike and watched JL weekly updates for several expiration cycles back in 2013.
    After reading a ton of useful information on internet I think I have pretty good idea of the underlying concept of M3.
    The attached document was complied from the information from several slideshows which I found on internet.
    Last edited: Jan 28, 2016
  6. Gabor Maly

    Gabor Maly Well-Known Member

    Since you have OV available do not give yourself ANY excuse on not backtesting this to death before going live. So much level of detail of the trade will come up during the process that will benefit you greatly. Having said that there is nothing wrong with testing in live conditions, lot of people do that, with small capital and with the goal of not making money but rather getting a feel for the trade.
  7. Trader G

    Trader G Well-Known Member

    This is so true. When you backtest, try and go through each day and pay attention to how the trade reacts and simulate the adjustments. Live trading brings a whole bunch of new factors to the table, but with the backtesting you get to really see how the trade performs day to day and in different markets.
  8. SVL

    SVL Well-Known Member

    Thanks for very good suggestions. Practice makes perfect.
  9. Boomer34

    Boomer34 Well-Known Member

    Great advice guys...I'm about to embark on a multiyear backtest as well!
  10. SVL

    SVL Well-Known Member

    As of 3:00PM today, all greeks are fine. T+0 line is flat. No adjustments are needed.
    It would be a very interesting test for managing this trade as I will be travelling next 3 days with limited access to internet. 2-2-16 15-00 RUT M3 Mar16.png
  11. SVL

    SVL Well-Known Member

    RUT was trading between my 2 short strikes at 15:30 and I had to move all BFs and IMC down.
    I decided to close it and got out with $335.23 profit .
    I will reopen it tomorrow as a fresh new M3 Mar 16 trade.
    2-8-16 15-30 RUT M3 Mar16 close.png
    2-8-16 16-00 RUT M3 Mar16 closed for $335.23 profit.png
  12. SVL

    SVL Well-Known Member

    After closing on Monday M3 RUT M3 trade for $335.23 profit , I opened today the new trade for same expiration but increased the size to 10 BFs 880P/930P/980P with 8 IWM 92 weekly calls with 2/26/16 expiration. As I am using IWM calls instead of RUT calls, my actual position is 10 times smaller ($12852 capital at risk).
    The new position looks as follows:
    2-11-16 15-00 RUT M3 Mar16 matrix.png 2-11-16 15-00 RUT M3 Mar16 analyze.png
  13. N N

    N N Well-Known Member

    With 39 days to expiry and the price in the middle of the tent, why did you close it out? Instead of perhaps adding a put spread or rolling one of the short puts down?
  14. SVL

    SVL Well-Known Member

    My understanding that the major risk of M3 is on downside.
    I have watched Kevin Lee's The Successful Trader of the Month presentation on JL community forum and took a note that he rolled his butterflies down after the price passed 20 points below his short strikes . This is Kevin Lee's comment on Apr 15 M3 thread: "My experience is if you shift the butterfly down whenever RUT is about 10 pts passed the short strike, M3 is very resilient to downside movements. Even if there is a sudden gap down of 10-20pts points pass your adjustment point, as long as the DTE is not too small, the damage won't be disastrous."
    Since this is my first live M3 trade, I prefer to be extra conservative and to protect primarily my downside. If I only make 2-3 % instead of 5-6 %, it is still a good result. Right now, I think my T+0 line looks great.
    Meathead and GreenZone like this.
  15. Sohil

    Sohil New Member

    Thanks for sharing your trade results and ideas, SVL. Is Kevin's presentation still available for everyone to watch? If possible, could you post link to his presentation? Thanks!
  16. vega4mike

    vega4mike Well-Known Member

    SVL - great trading - Like how you are trading the M3 small using IWM to get your feet wet.
    Sohil - I think you will have to be a member of JL community to get access, if not John will post to youtube after about 3months.
  17. Sohil

    Sohil New Member

    Thanks vega4mike for the information!
  18. SVL

    SVL Well-Known Member

    Thanks for your good words.
    In order to watch Kevin Lee's presentation , you have to be a premium member of JL community. It is a 20 USD a month subscription but is absolutely worth it . Especially for anyone who wants to learn M3. You could download T-logs of John Locke's demo trades for last 5 expiration cycles ( the ones he demonstrates every Monday at 9:00 AM) and could watch "The successful Trader of the Month" presentations where the "Ugly" traders show their live trades.
    I watched Kevin's presentation 3 times already and every time you learn more and more. He showed his live trade for Feb 16 expiration and this was a very challenging period for any neutral market traders. Somehow I feel very lucky that I started learning M3 during this very rough period and was able to watch how Kevin managed his live $600,000 trade in most difficult market conditions. This made me fully aware of the downside risk of M3 trade and left no illusion that this is a simple trade. In fact I think this is a very complex trade which teaches you to apply simple adjustments to keep your risk under control and odds of winning strongly in your favor.

    The Good, the Bad, & the Ugly

    This from Michael Catolico from TheOptionClub Yahoo group.

    The assumption is that any strategy followed over and over again will end up with zero profit.
    and yes, I believe that adjustments are the key to profitability - or rather, skillful adjustments are what separate the winners from the losers.

    if I can digress for an indulgent bit, let me suggest that there are really only three types of folks that actually win at options trading

    (sort of my version of the "good, bad & ugly"):
    1 - the lucky
    2 - the fortune tellers
    3 - the skilled

    Every new trader should test to see if she or he is actually lucky before ever wasting a moment trying to learn about the market.
    The way to do this is simply to take say $5,000 buy some short term options randomly or "on a hunch".
    Then, whatever happens to that trade, take the proceeds and plow the entire amount back into a similar guess-type trade the next month.
    Do this until you either lose the whole $5k or turn it into $4-$5M. at which point remove your money and never make another trade again.
    I would put the odds of actually being this "good" are really about 100 million to one but oddly I have personally known two people that fit this category.
    The first mistakenly took his success as a sign of skill and proceed to give it all back and then some.
    The second was smart enough to know it was a fluke and took the proceeds and started another business (which he is actually good at) and turned that nest egg into a lot more golden geese.

    The "bad" in my little metaphor is the catch-all category of "fortune tellers". Most people know these types by the more familiar terms as technical analysts and fundamental analysts.
    As you probably know I am a believer in "weak" efficiency for the market. This is mainly because I have never been able to predict either price or volatility direction with anything better than 50/50 success.
    Not that I haven't spent a lot of years trying both sides including a decade or more of immersion in TA and spending time and money to get an mba in finance/accounting and a cpa to boot.

    Just because I could never figure out how to predict the future doesn't mean that there aren't some who do.
    But here's why I call this category of winners "bad":
    Almost every guru and market "expert" is out there peddling a system or method essentially premised on "finding winning trades," and following this line of thinking ultimately busts out most traders.

    Most novices and in fact most retail traders believe that predicting the future is the key to winning the market and sometimes cautiously, often gullibly, latch on to the system sellers and prognosticators.
    They spend very little time learning much about how options work and, in truth, if they are actually very good at picking winners, don't need to know much more than that options help them leverage those predictions.
    I’d say that no more than 1 in 100 actually have the ability to consistently pick winners at better than even odds.

    The way to find out if you are a fortune teller is fairly complex but testable. Get yourself reams of historical price and fundamental data.
    divide the data sample in half. on the first half, find 30-40 assets that beat or failed to match the market by +/-20% or more in a three month period.
    Use all your perception, reasoning and intuitive powers to find some common denominator in that group of anomalies .then take that finding and screen the other half of your sample.
    if you find that you can spot similar outlier/big movers in the test sample with your method, you may have struck the mother lode and are probably a bona fide fortune teller.
    [needless to say, but obviously anyone touting a system or method publicly has either tapped out on a formerly successful system or is just a scam artist - the only way to discover a winning method of this sort is to create your own.]

    trade this discovery/knowledge carefully and as you build up a continual track record grow your wealth to the millions or more mark. again i would caution that if you ever reach the "richer than you need to be" stage, bow out and never trade
    again. but in this instance you can then sell your secret method for additional untold millions.

    the final type of winner is what i would term an "ugly" trader. this isthe kind of person that somehow manages to always and consistently find a way to make money.
    regardless of market direction, regardless of volatility, regardless of liquidity, etc. t
    they are usually huge students of this game, can erect and dissect a position as though it were second nature, are obsessed with risk (both in protecting against disaster and embracing certain types of extremes) and can trade instinctively.
    this category is the one that i believe most folks should either aspire to or eventually wind up pursuing after failing at the first two categories.

    unfortunately i would say only 1 in 20 or so ever achieve any kind of success as skilled/ugly traders.
    if you'll notice, when you add up the odds, i'm suggesting only around 6% or so of traders ever wind up being big or long term winners.
    but that is the grim reality of trading. and when you realize that options hold negative odds similar to casino games like blackjack, you'll know why i tend to preach cautiously when i respond to discussion threads on these boards.

    Michael Catolico


    GreenZone likes this.
  19. SVL

    SVL Well-Known Member

    John Locke participated in CD Trading Group 2 session on Nov 19, 2014 and showed how to make adjustments on a strong down move .
    You can start watching from 30.00 till the end. There is a lot of very helpful information for beginners like me.
    N N, Balazs and Timo like this.
  20. status1

    status1 Well-Known Member

    I watched the video and while it looks interesting I am not sure how that trade would have worked out in reality
    I think knowing which way the market is going to move in advance I think it helps to make the adjustments easier I think anyone could do that with a little practice although I am sure JL knows how to do it in reality as well but I am not sure if he would have made the same adjustments without knowing in advance which way the market is going

    The other doubt I have is with the simulated trade in option view Since I don't have OV I am not sure how close is that to a real trade
    What I mean by that is are the profits and losses factored in when all the adjustments are made ? It doesn't seem like they are
    It seems like it's all static like it did not loose anything with all those adjustments
    I did not see the p/l change from the beginning to the end
    Normally when an adjustment is made unless the entire trade is closed and a new one opened either the t-0 line or the expiration would be higher or lower In the video it seems like the t+0 line seems to be relatively unaffected with just the expiration line moving around

    For example if I have a butterfly and the market went down 40 points and lets say I move the upper long down I will have a certain amount of gain but at the same time while I placed the trade in low vol environment now that the market is down the vol is higher so even though I made a gain on the upper long put the cost of the new lower long is higher due to the higher vol so this should affect the expiration line which I don't believe it's reflected in the video

    Someone can correct me if I am wrong about this but that's at least how TOS behaves I am not sure how OV works
    One time I had a live trade in TOS which I was also following on the paper trade account by just placing the trade at the same place with the exact price but not actually getting filled and It all looked the same until one day I made an adjustment in the live trade to lock in some profits and after that the 2 risk graphs looked quite different with the t+0 line a lot lower on the live trade than on the paper trade even though I made the exact trade the only difference being that on the paper trade I did not account for the profit taking

    I can do that on TOS and keep the t+0 line flat if I disregard all the losses pay no attention to the margin or risk and just move the position to fit the t+0 line like a video game but I am sure it will not be the same in reality

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