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Jeep trade

Discussion in 'Options' started by David Stewart, Apr 29, 2014.

  1. David Stewart

    David Stewart Well-Known Member

    I don't see any posts here yet, anyone want to talk about the Jeep structure, I am game. I have traded it a few times and done pretty well. I was trying to put it on about a month ago and the price was good for a moment but then the market bounced hard and the price collapsed (on the put credit spread) :)
     
  2. James (Jim):
    Do you ever trade the Jeep using the SPX?
    If not, why not?
    If so, what differences do you see between the two indices?

    John
     
  3. tom

    tom Administrator Staff Member

    Dan Harvey told me recently that he doesn't trade the weirdor (jeep) in RUT because the premiums are too low. When he trades weirdors, he's using SPX and NDX. That said, in low vol markets he likes bearish butterflies. I traded a weirdor for the April cycle and just barely made a profit. The whipsaws were tough to keep up with. I used some directional training from Joe Ross and got short delta around 1145 as RUT was selling off. That ended up saving the trade but easily could have been whipsawed again.

    I posted the recording of Jim's Jeep presentation at
    http://www.youtube.com/CapitalDiscussions
     
  4. David Stewart

    David Stewart Well-Known Member

    It all depends on entry etc. I traded the APR cycle for RUT with a JEEP structure and did very well, but I entered on FEB 3rd (74DTE) And I did use 30 pt wide strikes on that particular trade to take in more premium.
     
  5. jim

    jim Administrator Staff Member

    Yes. I do trade Jeeps in the SPX. My input parameters (e.g., Delta of short strike, wing length, DTE, max capital per tranche, profit targets, etc.) are slightly different. Over the last year or two, the SPX Jeeps have been more profitable than RUT... but this could be said about most premium selling strategies. The premium (or IVs) in the RUT, use to be more chronically overvalued than they have been over the last couple of years.

    Jim
     
  6. David Stewart

    David Stewart Well-Known Member

    Thanks for the great program last night Jim I enjoyed it, just missed Paul's humor though :)
     
  7. jim

    jim Administrator Staff Member

    David, your observation was astute. This occurs on a regular and consistent basis whenever the market takes a quick move lower. The IVs and the Put Vol Skew cause the price of the Put credit spread to change quickly. You will get better pricing when you are trading against the market (i.e., buying Delta when the market is moving lower). It is believe (I have no imperial data to prove this) that it is impossible to produce consistent profitable results it you only start a trade on a specific DTE (days to expiration). I believe that you must 1) know your trade pricing and 2) enter your trade ONLY when pricing is attractive… I know that is a basic as “buy low, sell high”… but it is very important, if you plan on being profitable.

    Jim
     
    Jose Perez likes this.
  8. David Stewart

    David Stewart Well-Known Member

    Yes, of course Jim, I agree. On another note, if it is a good day to collect some "juice" on the put credit spread, it will NOT be a good day to collect "juice" on the call credit spread. Is there any way around this? One time I tried to hold off on selling the call credit spread as I was looking for a bounce so I could collect more premium and the bounce never materialized and I screwed up the trade as the next day the market was down further and I couldn't get anything for the call side credit spread. I guess I should have drawn a line in the sand and by time it was near the end of that day I should have taken what I could get on the call side. That was the only time I took a loss trading the JEEP structure as I ended up just closing the whole thing down a day or two later as I just didn't like my structure at all at that point. I don't know about anybody else but I seem to be a little better at identifying an intermediate term market top then I do identifying an intermediate term market bottom. I think that is because an intermediate term low in the market is more of a protracted process where as an intermediate term market top takes a little less time to occur. My dad is 90 plus years old now, so doesn't follow the market very closely anymore, I used to be able to use him as a perfect contrarian indicator because at market tops he would call me and ask me why I wasn't buying more stocks for his portfolio. :D Don't get me wrong I love my dad dearly, but those phone calls were 95% accurate as an indicator of a market top ;)
     
  9. jim

    jim Administrator Staff Member

    -------------------------------
    I like to enter into the whole Jeep trade completely in a single day.... Especially on down days, when the volatility pops. I'm just make sure I sell fewer, or further out of the money, call spreads... Many times when the market bounces back after a sell off / down day, volatility comes out of the call spread, helping to offset some of the money loss to that Delta move. While I am giving up some potential money on the call spreads, I don't get whipsaw. ESPECIALLY because my market timing capability is not nearly as good as yours! ;)
     
  10. Jim:
    1. In your presentation you showed two Word documents that you said would be available for download. Could you post those documents here?
    2. One document was "Basic Trading Guidelines" for the Jeep Trade. In that document you showed DTE to be 72 to 45 (compared to 72 to 57 in you PowerPoint). Please comment on this difference?
    Thanks,
     
  11. jim

    jim Administrator Staff Member

     
  12. jim

    jim Administrator Staff Member

    1) Please find attached, the Word file that I developed to help me build trading strategies... (Tom Nunamaker: Aren't you impressed? I added this file all by myself. Web Master of the world beware! :))
    I think about any trading strategy in three separate phases, namely 1) Setup & Entry (i.e., "get in"), 2) Adjustments (i.e., "manage risk") and 3)Trade Exit (e.g., "get out"). The attached Word file is just something that I use to help me organize my trading plan. Also remember... "Plan the trade. Trade the Plan."

    2) the 57 DTE was an older number that Paul Demers and I originally used... We have both since realized that in lower IV environments, that it is sometimes better to wait a little longer until the market gives us a "vol pop" which helps the Jeep (and most other trade) attain a slightly better risk / reward ratio.

    Jim
     

    Attached Files:

  13. tom

    tom Administrator Staff Member

    I am impressed Jim! Nicely done.
     
  14. Jim:
    Would you elaborate on how you determine that the put spreads that you are looking to sell are overvalued/expensive and that they are not in “the bottom 20 percentile”?
    Thans
     
  15. Jim:
    You have not answered my last post.
    Here is another question regarding using broken wing butterflys as downside adjustments: Is there a particular location where you like to place the BWB? (e.g. close to the put debit spread, close to the put credit spreads or somewhere in between)
    Thanks,
     
  16. jim

    jim Administrator Staff Member

    John,

    I was referring to the the Vol Skew or Put Skew regarding "the bottom 20 percentile." If the Vol Skew or Put Skew becomes to "flat" or "less negative" (i.e., in the bottom 20 percentile over the last year), it is MUCH more difficult to make money with the Jeep Trade. Put Skew is a graph of IVs for each strike for each expiration or time series. For each expiration in the RUT (and all all other Equity broad based indexes) the IV Skew looks like a smile wight he left side (i.e., the PUT side which is below the money) is normally MUCH higher the the right side (i.e., Call side)... this is why we call it a PUT Skew. We use a proprietary Implied Volatility system to measure Vol Skew, build models for the probability of how Vol Skew will change based on historical data, and evaluate event risk (i.e., a Fed Meeting or important Economic data like a Jobs report). If you don't want to spend $100s of thousands of dollars like us, I would suggest that you look at free sources of Vol Skew data. I have attached two examples for the RUT Skew from two popular option Brokers... thinkorswim and LiveVol.


    NOTE: the reason that I like the LiveVol Skew charts MUCH more than the thinkorswim Skew chars is the following:
    1) With LiveVol: You can see up to two full years of history on how the entire Skew curve has change day by day and compare that to the current realtime data. TOS: only real time Put Skew.
    2) LiveVol has much more flexibility and easier to setup and change parameters quickly. This is makes my analysis quicker, easier and more informative.
    3) I like the LiveVol graph better. It is a 3D model that can be rotated. This makes is much easier to see the Put Skew and how it changes with time (i.e., LiveVol lets me see history)
    4) You can (although I don't recommend it for retailer traders) provide your own Put Skew model to do what if analysis.

    I know nearly all of you are familiar with thinkorswim... here is the tos URL...

    http://cdurl.us/tos

    ... nice short URL, huh? :cool:

    ... but not as many know about LiveVol... Here is the LiveVol URL...

    http://www.livevolsecurities.com

    NOTE: I am fully aware of the issues that thinkorswim is currently having with regard to properly calculating the GREEKS. I know that they are working on it. I am cautiously optimistic (or hopeful might be more accurate) that they will resolve this major issue shortly.

    Jim
     

    Attached Files:

    Last edited by a moderator: May 9, 2014
  17. jim

    jim Administrator Staff Member


    John, it depends upon how negative the Put Skew gets and the distance between the short Put of my debit spread and the short Put of my credit (i.e., the entire length of the roof of the Jeep)... That being said, when possible, I like the long Put wings of the adjustment / BWB to buy back the two short Puts (I previously mentioned) and the short Put (i.e., the center of the Put BWB to be close to the lower short Put... I usually like the long Put wing of the BWB to be 20 points longer than the short wing of the BWB....

    I know your next question will probably be... "How many Put 'BWB do I like to use?"
    Answer: as few as possible, while still managing my position Delta.
     
  18. Chuck Moore

    Chuck Moore Well-Known Member

    Jim,

    I do not know what the 2 short puts you "previously mentioned" are. Are referring to the shorts of the debit spread of the original JEEP position or the shorts of both the credit and debit spreads?
    Maybe an example would help...
    For instance if I have a credit spread of 1000/1020 and a debit spread of 1080/1100, would the BWB adjustment have its long puts at 1020 and 1080 and then you place the short put as close to the 1020 short from the credit spread (for example at 1040) as makes sense?

    Thanks,

    Chuck
     
  19. Chuck Moore

    Chuck Moore Well-Known Member

    Hi Jim.....It's been a while and you have not addressed my question. Is this still an active forum?

    Thanks,

    Chuck
     
  20. jim

    jim Administrator Staff Member


    Chuck,

    Sorry I didn't get back to you sooner.

    Yes you are exactly right... the "Short Puts" that I was referring to was the short Put of the debit spread (i.e., the top of the Windshield in the JEEP structure) and the short Put of the credit spread (i.e., the very back of the roof in the JEEP structure). The reason that I like buying back my short Puts, as long as the Put Skews makes sense, is simply for house cleaning purposes. Since I am going to be closing this short Put positions at some point between now and the end of the trade.... I figure 1) why not close them now (again only if the Put Skew makes sense) and 2) it makes for less strikes for me to watch. Others may prefer to track their adjustments separately. I can understand that. (My risk management system allows me to look at each leg and adjustment separately).

    As for the center short Puts of the Put butterfly. Again your summation was correct. The center short Puts of the Put butterfly short be closer to the lower priced long Put wing (i.e., closer to the back of the roof than it is to the windshield in the JEEP structure).

    I hope that this clears it up. If yiou have any other questions please let me know.
     

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