How to Adjust Options Positions for High Yield

smbcapitalJohn Locke, M21 Trading System, SMB OptionsLeave a Comment


Many traders learn the M3 and fall in love with it.

They love the high win rate, mild draw downs and ease of management when properly traded. After all the M3 Trading System was designed to minimize your risk while you learn to trade.

Essentially the M3 allows you to earn while you learn with low risk positions. It makes sense that risk adverse traders gravitate towards this type of trade.

Other traders, once they’ve mastered risk management techniques in the M3, want more. And therein lies the problem. You see, there is no free lunch in trading and to get the characteristics in the M3 strategy, you need to give something up and in this case its high yield.

How to Reduce Price Movement Sensitivity

Unfortunately most high yield income trades come with a cost also and that cost is that they are extremely sensitive to price movement and usually produce major losses with large moves in either direction.

The Bearish Butterfly is the ultimate high yield income trade. When market movement matches up with this trade, the results are amazing. The unique entry, capital scaling and greeks adjustment design of the Bearish Butterfly has taken away most of the price movement sensitivity of your typical high yield income trade. This too comes at a cost, however, and that cost is the trade sensitivity to large extended periods of upward price movement.

This means that in order to get the best performance from our trading, we want to be in a high yield income trade when the market is not likely to move very much and be in a protective low risk position when the market is likely to have large unpredictable movement.

When to Correctly Enter Aggressive Positions

What if there was a simple way, without looking at charts or guessing direction, to determine which type of position to enter?

The ROCK trade uses a simple and effective entry test that helps determine whether the market makers and others “in the know” are expecting large unpredictable price movements or slower, more predictable price movements and we use this to our advantage.

We use the results of our test to determine whether we should enter the market in an aggressive high yield position or a more protective low risk position thereby maximizing our chances to enter in the most favorable configuration.

What if conditions change during the trade?

That’s OK, too.

If you entered the trade in a “high yield” position and the market moves down excessively, The ROCK trade’s adjustment sequence gradually shifts the trade from an aggressive high yield position to a defensive position that can much better handle large price movements and improve your chances of winning the trade.

The opposite is also true. If the trade is entered in a protective position and the market transitions into an upward grind, the ROCK trade’s adjustment sequence gradually shifts the trade into a more aggressive high theta position to maximize gains.

All the best,

John Locke

Risk Disclosure
No relevant positions

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