Hello all I am going to be trying a trade in 2019 that, when backtested, gives some pretty nice returns. This is NOT my trade, it was crafted by John Locke, and is called the M3. I will be trading the RUT options exclusively, using a max planned capital of $50k, and P&L numbers will be measured against that number. So a $5k profit would be a 10% return. The idea is a 10-20-10 put butterfly 40-60 DTE around 30 points below the market. Then, depending on the delta, I will purchase 1 RUT in the money call of a delta of 80 or greater to offset the position delta, making the position essentially delta neutral. If the butterfly's delta is much greater than -80, I will increase the number of butterflies accordingly to make the entire position delta neutral with 1 RUT call. From there, I will monitor the greeks, making adjustments/adding/removing various option structures to keep my greeks in line with loosely established parameters. The profit target AND max loss on this trade will be $5k, with a win/loss ratio between 70-80%. Depending on the market, I may take profit sooner (or incur a loss sooner) if the position greeks cannot be corrected, and staying in the position risks further loss. Long of the short: Delta neutral, gamma neutral, theta positive, vega negative. Keep them that way as much as possible and let the theta burn! Here is the April 1500/1550/1600 P w/1 1500 C trade as entered today: Here is the analysis screen: As you can see the T+0 line is nice and flat both ways, providing me with a nice hedge both ways and the ability to sleep at night . Anyway, comments and suggestions are welcome. I will be posting when I open, adjust, and close, and maybe some in between with any noticeable anomalies/noteworthy events. Let's roll! P.S. Tinypic seems to be having issues, apologies if the pics don't show. Any suggestions on who to use for images in post would be appreciated. The image can be viewed by opening in a new tab.
Not saying it won't work, but here is a little testing i did. I know you won't sit back and just take an adverse move (but then darn near all the big moves will be adverse), but looks like you won't hit $5K profit until about 4/1. So about a month, but then RUT (I used IWM) can move a lot in a month. An IV drop will help you a bunch, tho. Approx curves for 4/1: Black is constant IV profit, Blue 10% IV drop, Red +10% IV change (all legs). And here are 10 years of IWM monthly moves: [Code/] Third Friday to third Friday changes (at Close) for IWM Start 20090417 Price: 47.75 20090515, 47.76, %Chg: 0.70 20090619, 51.31, %Chg: 7.43 20090717, 51.90, %Chg: 1.15 20090821, 58.15, %Chg: 12.04 20090918, 61.91, %Chg: 6.47 20091016, 61.68, %Chg: -0.37 20091120, 58.59, %Chg: -5.01 20091218, 61.18, %Chg: 4.42 20100115, 63.68, %Chg: 4.09 20100219, 63.06, %Chg: -0.97 20100319, 67.41, %Chg: 6.90 20100416, 71.46, %Chg: 6.01 20100521, 65.07, %Chg: -8.94 20100618, 66.80, %Chg: 2.66 20100716, 61.07, %Chg: -8.58 20100820, 61.15, %Chg: 0.13 20100917, 65.21, %Chg: 6.64 20101015, 70.29, %Chg: 7.79 20101119, 72.45, %Chg: 3.07 20101217, 78.02, %Chg: 7.69 20110121, 77.19, %Chg: -1.06 20110218, 83.35, %Chg: 7.98 20110318, 79.46, %Chg: -4.67 20110415, 83.51, %Chg: 5.10 20110520, 82.86, %Chg: -0.78 20110617, 78.23, %Chg: -5.59 20110715, 82.81, %Chg: 5.85 20110819, 65.28, %Chg: -21.17 20110916, 71.52, %Chg: 9.56 20111021, 71.13, %Chg: -0.55 20111118, 71.98, %Chg: 1.20 20111216, 72.26, %Chg: 0.39 20120120, 78.25, %Chg: 8.29 20120217, 82.79, %Chg: 5.80 20120316, 83.00, %Chg: 0.25 20120420, 80.21, %Chg: -3.36 20120518, 74.69, %Chg: -6.88 20120615, 77.22, %Chg: 3.39 20120720, 78.93, %Chg: 2.21 20120817, 81.71, %Chg: 3.52 20120921, 85.50, %Chg: 4.64 20121019, 81.85, %Chg: -4.27 20121116, 77.48, %Chg: -5.34 20121221, 84.19, %Chg: 8.66 20130118, 88.57, %Chg: 5.20 20130215, 91.74, %Chg: 3.58 20130315, 94.75, %Chg: 3.28 20130419, 90.61, %Chg: -4.37 20130517, 99.05, %Chg: 9.31 20130621, 95.97, %Chg: -3.11 20130719, 104.31, %Chg: 8.69 20130816, 101.68, %Chg: -2.52 20130920, 106.59, %Chg: 4.83 20131018, 110.69, %Chg: 3.85 20131115, 110.83, %Chg: 0.13 20131220, 113.93, %Chg: 2.80 20140117, 115.93, %Chg: 1.76 20140221, 115.66, %Chg: -0.23 20140321, 118.61, %Chg: 2.55 20140417, 112.92, %Chg: -4.80 20140516, 109.57, %Chg: -2.97 20140620, 118.25, %Chg: 7.92 20140718, 114.23, %Chg: -3.40 20140815, 113.39, %Chg: -0.74 20140919, 113.97, %Chg: 0.51 20141017, 107.48, %Chg: -5.69 20141121, 116.58, %Chg: 8.47 20141219, 118.90, %Chg: 1.99 20150116, 116.70, %Chg: -1.85 20150220, 122.38, %Chg: 4.87 20150320, 125.99, %Chg: 2.95 20150417, 124.43, %Chg: -1.24 20150515, 123.65, %Chg: -0.63 20150619, 127.86, %Chg: 3.40 20150717, 125.76, %Chg: -1.64 20150821, 115.03, %Chg: -8.53 20150918, 115.72, %Chg: 0.60 20151016, 115.42, %Chg: -0.26 20151120, 116.81, %Chg: 1.20 20151218, 111.48, %Chg: -4.56 20160115, 100.12, %Chg: -10.19 20160219, 100.45, %Chg: 0.33 20160318, 109.61, %Chg: 9.12 20160415, 112.45, %Chg: 2.59 20160520, 110.79, %Chg: -1.48 20160617, 114.06, %Chg: 2.95 20160715, 119.70, %Chg: 4.94 20160819, 122.94, %Chg: 2.71 20160916, 121.86, %Chg: -0.88 20161021, 121.07, %Chg: -0.65 20161118, 130.99, %Chg: 8.19 20161216, 135.91, %Chg: 3.76 20170120, 134.44, %Chg: -1.08 20170217, 139.11, %Chg: 3.47 20170317, 138.46, %Chg: -0.47 20170421, 137.21, %Chg: -0.90 20170519, 136.03, %Chg: -0.86 20170616, 140.19, %Chg: 3.06 20170721, 142.55, %Chg: 1.68 20170818, 134.92, %Chg: -5.35 20170915, 142.41, %Chg: 5.55 20171020, 149.98, %Chg: 5.32 20171117, 148.45, %Chg: -1.02 20171215, 152.24, %Chg: 2.55 20180119, 158.60, %Chg: 4.18 20180216, 153.34, %Chg: -3.32 20180316, 157.80, %Chg: 2.91 20180420, 155.55, %Chg: -1.43 20180518, 161.87, %Chg: 4.06 20180615, 167.81, %Chg: 3.67 20180720, 168.48, %Chg: 0.40 20180817, 168.35, %Chg: -0.08 20180921, 170.40, %Chg: 1.22 20181019, 153.36, %Chg: -10.00 20181116, 151.94, %Chg: -0.93 20181221, 128.37, %Chg: -15.51 20190118, 147.33, %Chg: 14.77 20190215, 156.22, %Chg: 6.03 TOTAL MONTHS = 118 DOWN MONTHS = 47 UP MONTHS = 71 %UP MONTHS = %60.17 AVG %UP MONTH = %4.44 %DOWN MONTHS = %39.83 AVG %DOWN MONTH = %-3.79 DROPS >= -8% = 7 [/Code]
FWIW should be an interesting trade. And most of the big moves are up, so won't hurt much and might help, at least in the early going. Good luck and let 'er rip!
How are you gauging the expected value of the trade? I.e. do you look at richness/cheapness of implied vols, skew etc.
There is a cottage industry in these type of butterfly trades marketed in interesting names. This is by former used car salesman marketed as M3, slightly different version ROCK etc. Each version comes with course work, weird rules, mentorship starts from $1200 and up, monthly membership $120 and up. Just tweak something like add calendar on the upside, it will be another $1200. It is pretty sad No they don't evaluate for anything. It is on entire time, adjusting with all kinds weird rules as they go along
That was my first thought when i heard that some modification of butterfly, marketed as M3. No wonder he was used car salesman. He worked for some time in sheridian mentoring after got laid off in 2007-08 financial crisis, then started this cottage industry.
I appreciate the analysis. Adjustment and/or adding call/put verticals to fine tune the greeks are a pretty decent part of the trade to account for moves, and in backtesting over the last 5 years, there were very few large moves that couldn't be traded around for at worst a small loss. We'll see.