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SMB TRAINING OPTIONS TRAINING PROGRAM Presents:

SMB TRAINING OPTIONS TRAINING PROGRAM Presents:. The M3 Trading System Part 1 Concepts and Greeks. Brought to you by SMB Training A World Leader in Options Education Created and taught by John Locke Locke in Your Success, LLC. “Know what you want, make it happen!”. John Locke.

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SMB TRAINING OPTIONS TRAINING PROGRAM Presents:

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  1. SMB TRAINING OPTIONS TRAINING PROGRAM Presents:

  2. The M3 Trading SystemPart 1 Concepts and Greeks • Brought to you bySMB Training A World Leader in Options Education Created and taught by John Locke Locke in Your Success, LLC. “Know what you want, make it happen!”

  3. John Locke • President of Locke In Your Success, LLC • Options Trader • Success Coach • Options Trading Mentor • The concepts of the M3 have helped many traders just like yourselves drastically improve their trading.

  4. Disclaimer • 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). • 8. No relevant positions.

  5. Hypothetical Trades Disclaimer • Please note: Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commisions. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.

  6. M3 Trade System • Market Neutral Trading System that I have been developing over the last 5 years specifically designed to teach and educate options traders how to identify and control risk in their positions. • I accomplish this by showing traders how to use the Greeks and Greek Trends of their position to properly interpret their risk and then teach them how to control that risk. • The M3 is designed to minimize riskwith price movement. • It is not designed to create large monthly profits.

  7. Advantages of trading the M3 • No searching for stocks. • No need to pick direction. • Can be entered regardless of market conditions. • MOST adjustments are not urgent. • No need to sit in front of the computer all day. • Can be traded from anywhere in the world that has an internet connection, even while on vacation.

  8. Trades With Hard Guidelines(trade in a box) • Usually designed for, and only work exceptionally well, in specific market conditions • Might work ok in many market conditions • Often take on excessive risk in order to create a favorable win/loss ratio • Great starting point for beginner and intermediate traders! As long as you keep in mind that… • Trading from a rule sheet DOES NOT teach you to become a great complex options trader, nor does it teach you proper judgment nor does it teach you to adapt to changes in the marketplace.

  9. M3 does not have “hard” guidelines • The M3 uses “loose” guidelines and concepts instead of a rule sheet. • Learning the concepts of the M3 as well as learning how, why and when to apply those concepts will help you understand your position and give you a better chance at making the correct decision. • When you learn, and really own, these concepts you shouldn’t need a “rule sheet”.

  10. The M3 concept analyzes Greeks and Greek trends to identify risk and make corrections before the risk becomes excessive • When we trade this way, the exact timing and methods we use to adjust are not that important. • What is extremely important, however, is that we hold to the concepts of the system and stay within the parameters we will discuss. • To teach the M3 concepts, I’m going to go through multiple examples and thoroughly explain where risk is, why or why not an adjustment might be made to mitigate that risk as well as what types of adjustments we could use and the new risk created by those adjustments. • Through time and practice, you’ll pick it up.

  11. Examples will be using RUT • RUT put butterflies with 50 point wings • Butterflies are hedged with either RUT calls, IWM calls or IWM stock depending on position size and how much incremental adjustability we want. • For the examples we will use RUT calls.

  12. Typical Entry Position

  13. That looks EASY! • At first glance the trade looks very simple, and in a way it is, but there is a lot going on under the hood that determines how it is managed. • The M3 is not just “a trade”, it’s a system specifically designed to help you learn how to trade.

  14. Underlying Concept of M3 • Maintain positive Theta, relatively flat Delta, low Gamma, negative Vega and favorable Greek trends. • More important than the “static” Greeks of your position are the trends of the Greeks of your position. • Your Greek trends are going to help you identify what is going to happen to the Greeks and how your T+0 (current profit and loss line) will change at any given price point on the analyze graph, as price moves, time goes by and volatility changes.

  15. Learning Tips • Go through the entire series at least 3 times! • The first time through part 1 is likely to be confusing as you are getting a ton of information without examples. I do this because you will not understand the examples unless you’ve been through this section. • Once you’ve been through this section AND seen the examples, this section should be much easier to understand.

  16. Static vs. Dynamic (trending) Greeks

  17. “Static Greeks and Desired Greek Trends” • The desired static Greeks and Greek trends of our position are going to vary depending on position size, the trend of the Greek we are looking at, what the 3 other Greeks and Greek Trends are doing at any given time. • Greek management is partially based off of position size. • For RUT, position size is determined from how many IWM calls the position has. (1 RUT call = 10 IWM calls) • For the examples the position size will be 1 RUT call (10 IWM calls)

  18. DeltaThe ratio comparing the change in the price of the underlying to the corresponding change in value of the position. • Assuming a position size of 1 RUT call: • +50 to (-)100 Delta is usually acceptable • Delta limits may vary considerably, be exceeded and may even become irrelevant depending on what the other Greeks are doing… particularly Gamma Trend.

  19. Delta Trend • Delta trend refers to how the position’s static Delta changes in relation to the movement of price, the passage of time and changes in volatility at any given point on the T+0 line. • You will not find a “number” on an analyze chart for Delta trend! It’s something that you will “get a feel for” through repeatedly analyzing positions over time. • We monitor Delta trend to help us understand our risk as it relates to future price and volatility movement.

  20. ThetaThe theoretical change in the value of your position over the next day. • Positive!!! • More is better!!! Right?? • More Theta is better ONLY if Gamma and Gamma trend are under control. There are many times where it is favorable to reduce Theta to mitigate Gamma risk. • Theta numbers are “theoretical”… this means if you have a Theta of 100 and a day goes by, the value of your position may not, and probably will not, change by $100!

  21. Theta Trend • Theta trend refers to how the position’s static Theta changes in relation to price movement, the passage of time and changes in volatility at any given point on the T+0 line. • You will not find a “number” on an analyze chart for Theta trend! It is something that you will “get a feel for” through repeatedly analyzing positions over time. • We monitor Theta trends to help us understand what our T+0 line will look like in the future thereby allowing us to identify our future risk at various price points on our T+0 line AND to help us understand when the T+0 line may not be as it appears.

  22. GammaThe rate of change of delta with respect to the underlying asset's price. • In General: (+) Gamma is good / (-) Gamma is bad. Unfortunately negative Gamma is a byproduct of Theta and since we are positive Theta traders, we will usually have negative Gamma. • Gamma can change considerably with small price movements. Therefore, the static Gamma value is only useful for small changes in the price of the underlying asset. • The “static” Gamma number is not all that important but the trend of Gamma is EXTREMELY important.

  23. Gamma Trend “THE most important, and most ignored, factor in determining price movement risk” • Gamma trend refers to how fast and in what direction + or - Gamma changes with price movement. • With proper positioning, favorable Gamma trend will allow you to hold a position with relatively high Gamma and Delta without being overly concerned with price movement, because as the price of the underlying moves, the Gamma and Delta numbers will improve. • Gamma trend can be observed with the analyze graph. • We use Gamma trend to help us recognize our risk related to large price movements

  24. VegaMeasures the change in the value of your position relative to a 1% change in volatility • This trade should maintain negative Vega…How much is determined by what is likely to happen to IV with directional movement, or non movement, and what the current IV levels are. • When IV is relatively high, especially under conditions when the price is likely to stabilize, then we want more negative Vega • When IV is low, especially when the price is very over bought, we want “less negative” Vega

  25. Vega Trend • Vega trend refers to how the position’s static Vega changes in relation to price movement, the passage of time and changes in volatility itself at any given point on the T+0 line. • You will not find a “number” on an analyze chart for Vega trend! It is something that you will “get a feel for” through repeatedly analyzing positions over time. • We use Vega and Vega trend to help us understand when the T+0 line may not be as it appears and to tell which options are responsible for holding the value of our position.

  26. M3 Trading System Concepts and Greeks Part 1 • Q+A • On to Part 1b !!!

  27. Here’s how the M3 works! • Buy bearishly positioned butterflies and hedge them with a stock, or stock substitute (Deep in the money call usually with 80 or higher Delta). • Balance the gains and losses of the butterflies with the gains and losses of the calls while taking advantage of time decay. • Assess risk daily by analyzing the Greeks and the Greek Trends and then adjust the position as needed to maintain positive Theta while protecting against volatility fluctuations and price movement.

  28. Entry Guidelines • Entry: For the examples we will enter 56 DTE. In reality you can enter anywhere from 70 – 15 DTE and sometimes even closer. • Butterfly Positioning: Short strikes 15 – 35 points below underlying (on RUT) • Purchase sufficient number of deep ITM long options (or stock) so the opening position is either flat Delta or leaning slightly in the direction of your market opinion and has the desired T+0 line. • If needed add verticals and/or move butterflies around to create desired T+0 and Greeks profile.

  29. Basic Action Plan • From here…We will monitor the Greeks and Greek trends to determine when to adjust the position. • In general, if Delta is between +50 and (-)100, Vega is negative and Theta is positive and the T+0 line and Greek trends do not indicate excessive risk then we will typically leave the position alone. If not we will use a variety of techniques to adjust the position.

  30. Planned Capital • Planned Capital “IS”a fixed number that we use to base our risk management numbers off of which 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. • We need a planned number because…Trades with varying capital cannot be properly managed with profits and losses based off of a percentage of “whatever is in the trade” because these trades almost always have substantially more money in them when they lose than they do when they win. • Using planned capital, your profit targets and maximum loss numbers will be predetermined or “fixed” DOLLAR amounts. • Planned capital may never reached or it may be exceeded, either way our profit targets and loss numbers remain the same.

  31. Planned Capital for M3 with RUT • Position size: Determined from how many IWM calls the position has at the initiation of the trade. 10 IWM calls=1 RUT call 100 IWM shares = 1 IWM call • Planned Capital: $5,000 - $ 8750 per IWM call • Butterfly/Call ratio of 1 to 1 – Planned Capital of $5000 • Butterfly/Call ratio of 2 to 1 - Planned Capital of $7500 • Butterfly/Call ratio of 3 to 1 - Planned Capital of $8750 • Target Profit and Max Loss: 10% of Planned Capital

  32. Profit Target and Loss Modifications • In the event you need to enter the trade at LESS than a 1/1 butterfly / call ratio, OR, you need to reduce your butterfly / call ratio to control the position, then you should consider cutting your profit target by ½ and your max loss by ¼. • For example…. If you have 1 butterfly with 2 calls: • $5000 Planned Capital • $250 Profit Target • $325 Max Loss

  33. Entry Position

  34. Entry Position

  35. Why do I use a deep ITM call when you could buy several OTM calls much cheaper and create a “T+0 line that “looks” the same? • Looks can be deceiving, just because the T+0 looks the same doesn’t mean that it is. • Deep in the money calls have virtually no “extrinsic value” and therefore carry virtually no Theta or Vega risk. This means that the price can sit and volatility can drop but the call will hold it’s value. • OTM and near the money calls carry significant Theta and Vega risk, both of which we do NOT want in the front quadrant of a butterfly. • If you have OTM calls on and the price sits or even goes up moderately, the OTM calls create both Theta and IV losses resulting in a drag on the position, creating the opposite effect of what they were put there for in the first place.

  36. Butterfly with deep ITM call

  37. Butterfly with 2 OTM calls

  38. “What if……” If 5 days go by with no price movement and a 2% IV drop: • The butterfly with the ITM call will theoretically gain … $829 • The butterfly with the OTM calls will theoretically gain… $68 If 5 days go by and RUT moves up +30 points with a 2% IV drop: • The butterfly with the ITM call will theoretically gain…$111 • The butterfly with the OTM calls will theoretically lose$506

  39. The deep ITM call allows us to create favorable Greeks and Greek trends outside the tent

  40. Object • The object of the game is to keep the proper balance between the butterfly and the stock or stock substitute while maintaining positive Theta, neutral Delta, low Gamma and negative Vega but most important I want to maintain favorable Greek trends in my areas of concern.

  41. Adjustments • Anything goes! • We are going to use a combination of techniques including buying verticals, buying calls, varying butterfly to call ratios, moving the butterflies around, moving individual options around, completely repositioning and other creative moves to maintain desirable Greeks and Greek trends while maintaining a reasonable profit potential, a reasonable amount of capital in the trade and a reasonable risk level.

  42. Primary Upside Adjustments • Buying ITM call verticals/selling OTM put verticals • Adding deep ITM calls • Rolling butterflies up • Altering the butterfly/call ratio • Buying OTM call verticals/Selling ITM put verticals • Repositioning Calls • Buying OTM Calls

  43. Purpose of adding ITM call verticals (or OTM put verticals) • Delta Control • Vega Control • Theta Control • Adding verticals will help control your upside Vega risk, improve the range of positive Theta on your T+0 line and create more positive Delta • These verticals are most effective when the market is moving up at a “normal” or “slow” pace and when the market is stagnant. • They have a limited benefit in very large up moves.

  44. ITM call or OTM put vertical creates more positive Delta AND more negative Vega as well as more positive Theta (-)Vega and (+) Theta will be increased and projected further in front of position

  45. But it will only help for a limited distance and time as the T+0 line flattens out with upward price movement and over time

  46. Buying Call Verticals vs. Selling Put Verticals • For reg t accounts (normally margined), it is a more efficient use of capital to use call verticals because, depending on the strikes you use, your account can be charged an excessively high amount of margin when rolling puts around. The down side to using call verticals is that they are deep ITM and have excessively large bid/ask spreads so you must price them properly to maximize your returns. • For PM accounts, rolling the puts around is typically a more efficient use of capital as margin is often reduced when rolling puts and you will have fewer trades, hence lower commissions. • Either way the positions are synthetically the same.

  47. Purpose of adding deep ITM calls or stock • Delta Control • Gamma Trend Control • Adding a deep ITM call will help control your upside Gamma trend by reducing Gamma and creating more positive Delta as the price moves up. It will minimally effect Theta or Vega. • The deep in the money call is most effective when the market is moving up at a “normal” or “slow” pace and when the market is stagnant. • They also work well with very large fast up moves.

  48. ITM call improves Delta AND Gamma trend with minimal Vega and Theta impact

  49. RUT Call, IWM Call or IWM Stock • You can hedge RUT butterflies with either IWM stock, IWM calls or RUT calls. Your choice will be primarily dependent on position size. • Positions with over 10 butterflies can use RUT calls. • Smaller positions must use IWM calls or stock. • Larger positions may use IWM calls to “fine tune” the Greeks when an additional RUT call is too large of an adjustment. • Smaller positions may use IWM stock to “fine tune” the Greeks when an additional IWM call is too large of an adjustment. • Anytime you need more fine tuning, you can use IWM in place of RUT

  50. Purpose of rolling butterflies up • Theta Control • Vega Control • Delta Control • Rolling butterflies up will increase positive Theta, negative Vega, negative Delta and improve the profit potential in the expiration graph at a higher price level. • Rolling butterflies up should be considered when the price spends several days higher than 10 points past the upper long strike of your butterfly OR when it is no longer possible to maintain favorable Greeks at the price level you are concerned about.

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