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Road Trip vs M3

Discussion in 'Options' started by Mark Mosley, Mar 16, 2016.

  1. Mark Mosley

    Mark Mosley Member

    I have been studying the Harvey Roadtrip trade, as well as John Locke's M3 trade. In Harvey's Roadtrip trade, he enters a 50/40 broken wing butterfly in the puts and hedges the downside with a "teeny" a cheapo out of the money long put with something like a 2 delta. The cost of the teeny doesn't seem like its all that expensive compared with the downside protection that it appears to provide.
    Similarly, in John Locke's M3 he enters a put butterfly with 50 point wings and uses a long call, deep in the money, with like a 80 delta, to hedge his upside risk. This long call is pretty expensive, although it offers alot of protection to the upside, it is pretty expensive.
    SO I guess my question is...does a long OTM put somehow offer similar protection to the downside compared to a deep ITM call does to the upside? wouldnt the roadtrip trade benefit from using an ITM put to hedge the downside compared to an OTM put? I guess my goal is to trade with somewhat limited funds and the long call of the M3 position is pretty expensive. Any comments on this?
     
  2. DavidF

    DavidF Well-Known Member

    Hi Mark,
    Note that a long call is, for all intents and purposes, the same as being long the index but with a long put at the strike, i.e., long SPY with a put at 180 is the same as a DITM 180 call. So the DITM call is actually more comparable to the OTM long put as a means of gaining downside protection. Of course with the call you´re also long 80-100 deltas initially, and this is offset in the road trip by pulling in the upper long put to create a similar profile. This has other consequences you´re probably familiar with.

    Kevin Lee did a very good analysis on this forum of how the imbedded put spread in a BWB compares with an M3 for down moves, showing the latter was better. Thus the road trip with a teeny could be a good combo to offset this.

    If you think the call is expensive you can sell an iron butterfly which will cover the cost of the call, but the most important thing is the P/L and/or T=0 line of the position, not the cost of any one component.
     
    Last edited: Mar 17, 2016
  3. ACS

    ACS Well-Known Member

    The M3 can be traded under most if not all market conditions while the RTT has a cut off point in price, above which it becomes difficult to make money. Both trades have limited risk to the upside and their greatest vulnerability is a big fast move down early in the trade. You can hedge that risk but it will cost something somewhere depending on how you put that hedge on and you need to decide if that cost is justified by how often the behavior you are hedging actually happens. There is no way to eliminate ALL risk in a trade and still make money since the profit you make is payment for the risk you are assuming and how you manage it.
     
    Chuck, Meathead and Tps like this.
  4. Andrei

    Andrei Well-Known Member

    As ACS said you can hedge some risk, but there is no way to eliminated it completely. Every time you set up a hedge you give up potential returns. M3 is very resilient on the upside, especially if you do not stay any longer than about 21-15 DTE. The longer you stay the more risky it becomes on both sides. You can hedge you risk without buying puts by getting out earlier and probably sacrificing some profit potential. You can also enter earlier than 56 DTE, may be as early as 75-80 DTE. Longer term positions are much easier to manage.

    For DITM call you can buy weekly calls and roll them over. I think 80 delta is not enough in the money, you will be giving up too much Theta, 95 delta is where it should be. Price difference can be dramatic, for instance 95 delta May call is now about $200, 95 Delta MAR4 call is $57. If you manage the rollovers carefully there is very little additional cost to it, but do not wait until the last day to roll it over. Rollovers should not cost you more than about 20c, and when the markets are volatile you may be able to do it for 0c or even credit.
     

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