The RUT Bearish Butterfly SMB Training OPTIONS TRAINING

The RUT Bearish Butterfly SMB Training OPTIONS TRAINING PROGRAM A Somewhat Average Month

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Position Size � � RUT Butterfly position size - 10 contracts scaling to 30. All profit, loss, Delta and Theta numbers within these guidelines are based off of the above position size. If you are trading a different position size, you will need to adjust these numbers accordingly. Delta/Theta ratios are the same regardless of position size.

Risk Management and Profit Targets � Planned Capital - $50, 000 � Minimum Capital Required in Account - $100, 000 � Profit Target - $15, 000 � Reduced Profit Target 21 DTE - $5, 000 � Max Loss - $15, 000 � All decisions are made at 3: 30 PM EDT. The daily range is ignored. UNLESS the trade is over profit target or under 9 DTE and we choose to stay in the position.

Trade Exits � � � Exit 1 – ($15, 000) profit target hit Exit 2 – ($5, 000) 33% profit target is hit 21 DTE of closer Exit 3 – Friday before expiration Exit 4 – Maximum loss number ($15, 000) is exceeded at 3: 30 PM EDT. Exit 5 – Any time the preponderance of evidence shows that the position is more likely to lose money than to make money if we stay in the trade AND it cannot be corrected. If we choose to stay in the position after exit points are hit, the position will be monitored and adjusted as needed.

Trade Set Up � Date: March 24, 2008 � RUT Price: 699. 80 � Entry Strikes: 680 � Purchase 10 – 630/680/730 Put Butterflies � Control Point: 680 � Add Points: 720/740 � Roll Points: 750/760/770/780/800 � First Downside Adjustment: 640

Matrix on Entry

Graph on Entry

Price Chart on Entry

April 11, 2008 Three Weeks Later

Analyze Graph

April 18, 2008 Maximum Delta/Theta Ratio of 1. 5/1 is Exceeded

Graph Before Adjustment

Since we did not reach the add point of 720, we will roll the 680 butterflies to 700 instead of adding to the position

Position After Adjustment

April 25, 2008 RUT has Exceeded 720 Add Point

Position Before Adjustment

Add 670/720/770 Butterflies

Graph of New Position

Price Chart

April 29, 2008 Profit Target is Hit

April 28, 2008 Analyze Graph

Taking The Trade Into Expiration � � It has been a relatively easy month. According to the core guidelines, the trade needs to be exited today. More experienced traders who are willing to risk losing a significant amount of money can stay in the trade and even bring it into expiration in order to do so. However we have decided to take the trade into expiration.

Guidelines For Trading Past Your Profit Target and Into Expiration � Must be willing to lose money in order to make more. � Must ALWAYS know your exit point. � Must be able to monitor the market and adjust as needed. � Must be able to incrementally adjust your position.

Trading close to expiration can be rewarding but it is risky � � � The closer you are to expiration the more vulnerable the trade is to a large price movement, even if you are up a significant amount of money. Gain and lose significant amounts of money with relatively small price movements. Because of the additional risk, we need to take precautions and trade differently. Must constantly and objectively weigh the risk of staying in the position. Takes more skill than simply “following guidelines”.

Must be willing to lose money in order to make more money � Once you hit your profit target or are at the Friday before expiration, in order to stay in the trade, you must be willing to risk at least 20% of your planned capital, in this case about $10, 000, if not, it is time to GET OUT! � ANYTIME you are no longer willing to risk losing a reasonable amount of money. It is time to GET OUT!

ALWAYS know your exit points � I’ve seen too many times where people have exceeded their profit targets and then proceeded to take much more than a maximum loss on a trade. � To avoid this, you MUST KNOW at all times the price points you will exit and the dollar amount of profit or loss you will exit at. � You MUST HAVE THE DISCIPLINE to stick to those numbers!

Must be available to monitor the market and adjust as needed �I typically check trades once per day as I have no desire to sit there and watch the stock market all day. However, when I CHOOSE to trade closer than 10 DTE I know I need to monitor the market to control my risk. �

Incrementally Adjust Your Position � You must be able to make small enough adjustments to control risk without over adjusting the position and opening up yourself to getting chopped out of the trade. � If you find yourself getting chopped up, EXIT THE TRADE and move on to the next month.

"Focus on the results you expect, not on the mechanics for doing the job. " � � � It is imperative that you stick to your risk management rules, your results, but it is equally important that you do NOT get caught up in the mechanics of the trade. Your “job” in the trade is to make as much as you can WHILE STAYING WITHIN YOUR RISK MANAGEMENT RULES. Do whatever is necessary to keep the probability of winning in your favor and when you cannot, EXIT THE TRADE

New Delta Guidelines � � � These guidelines are for the bearish butterfly trade on RUT, starting with 10 contracts, scaling to 30. The numbers must be modified if trading a different position size. These guidelines are only to be used when trading near expiration or when the profit target is exceeded AND you choose to stay in the position. These guidelines can be loosely followed if the profit target has not been achieved or if it has been achieved and the trade is over 7 DTE but should be strictly followed if the trade has hit profit target AND it is 7 DTE or closer. Of course the closer you are to your target and expiration, the more closely you should follow these guidelines.

Intraday Delta Guidelines � Intraday 10 AM EST – 3: 30 PM EST maximum position Delta is +/- 500. � When Delta is exceeded, remove, add or reposition butterflies to correct delta to between 300 and 450. The Delta must remain the same sign. IE. – 550 Delta would be corrected to – 350 Delta NOT + 350 Delta. � Maximum size is 30 contracts.

10: 00 AM and 3: 30 PM Delta Guidelines � AT 3: 30 PM EST maximum position Delta is +/250. � Delta prior to 10: 00 AM and after the 3: 30 PM adjustment is made, will be ignored. � If Delta is greater than +/- ~250, Adjust Delta to between 200 and ~250. The Delta must remain the same sign. IE. – 550 Delta would be corrected to -250 Delta NOT + 250 Delta.

Exit Guidelines � � � Whenever you hit your predetermined numbers OR you are not willing to lose additional money. Whenever you are satisfied with your profit. Whenever a 15 point overnight more will put you past your maximum loss number and you cannot reasonably correct the position. Whenever Gamma is so high that you cannot withstand “regular” price movements without constantly adjusting the position. IE. Whenever the position becomes unmanageable. Whenever you feel the odds of making more money are no longer in your favor.

May 2008 Expiration April 29, 2008 Under 21 DTE Profit Target is Hit

April 29, 2008 Analyze Graph

� Up April 29, 2008 Situation $6340, which is past the reduced profit target per guidelines. � How much am I willing to risk at to stay in? 10 K � Can I adjust the trade to meet my new Delta guidelines and take an overnight move of at least 15 points and not exceed my loss numbers? � What is my exit point? When trade is down $3700