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The "Harvey" vs "Reverse Harvey" Adjustment

Discussion in 'Options' started by johnyoga, Feb 29, 2016.

  1. johnyoga

    johnyoga Guest

    Hello Folks,

    Perhaps I am missing a nuance, but, why would anyone want to do a "Reverse Harvey" over a "Harvey"?

    If the underlying rose above the right corner of the tent: With the "Harvey" on the Butterfly topside, you are closing out all or a portion of your short puts and raising them. This is a good thing, as you've already enjoyed premium capture, and now going after a richer premium put.

    With the "Reverse Harvey" you are hit with two losses: 1. You take a loss on the topside put by closing it, and, you take another "loss" because you are pushing the long put further down the options chain.

    Therefore, it would seem to me, if your choosing between the two, you'd "always" pick the "Harvey".

    What did I miss, if anything?

    Thanks, in advance for your time & insight. :)

    Regards,

    Marc
     
  2. Capt Hobbes

    Capt Hobbes Well-Known Member

    Harvey and Reverse Harvey are actually the same thing. In both cases you are buy a lower strike and sell a higher strike. In Harvey you buy an existing short, in Reverse Harvey you sell an existing long. Both are a bull vertical, just applied in different places. This difference is what would dictate your choice of one over the other. One obvious aspect is that because the vertical of RH is closer to the money, you get more oomph for the same number of contracts. Oomph being the amount of positive delta and the credit received (the credit is what lifts the expiration line on the right side). So, you might choose one over the other simply because it brings you closer to what you want. The less apparent factor is how you expect the IV curve to change. For example, if you expect the IV to drop and the curve to steepen, as happens in a market advance, the bull vertical closer to the money would benefit more from such a curve shift. In that case a Reverse Harvey would be preferable.

    Thinking in terms of profits or losses on an individual leg is counterproductive. You will have legs with losses in any spread trade, that's the nature of the game. Only the net result matters.
     
    Murphy Tan likes this.
  3. johnyoga

    johnyoga Guest

    I guess I am not understanding.

    When you sell the topside long put for a loss, that is real. When you reapply it at a lower strike, it costs additional money, that is also real. The net result is a loss.

    This, compared to buying back a portion or all of the short put for a profit, that is real, and moving it up allows you to capture more profit.

    I can show Option Vue snap shots if what I am saying is not clear. They both help to flatten out the T0 curve, true. I heard Harvey say that he may, at times, do what I'll call "splits the short puts"; he moves half of the shorts up, thus turning the PL curve to somewhat of an Iron Condor.
     
  4. Capt Hobbes

    Capt Hobbes Well-Known Member

    Your accounting is incomplete. It is true that the outcomes may be a realized loss vs a realized gain. However, you are forgetting about unrealized gain/loss. In case of a Reverse Harvey at a realized loss you end up with a larger unrealized G/L than in case of Harvey at a realized profit.

    The simplest way to see that it must be so is to consider that a position adjustment (in the ideal world of zero slippage and zero commissions) has no effect on the current net PnL. If you are up or down X dollars on a trade before an adjustment, you are still up or down the same amount after an adjustment. You can't make free instant money simply by placing a trade. The only thing an adjustment changes is the trade outlook (and, in the real world, makes you lose a little on slippage and commissions).

    Your current net PnL is the sum of current realized profit(loss) and current unrealized profit(loss). So if one scenario gives you, say, $500 of realized loss and the other $300 of realized profit, it must follow that the final unrealized gain(loss) in the first scenario will be $800 greater than in the second.
     
  5. johnyoga

    johnyoga Guest

    Thanks for explaining Capt.
     
  6. Venrcew

    Venrcew Well-Known Member

    Capt Hobbes apology for bring this quite a while topic discussion up.

    1) Does doing a rh on the lower strikes of bb has the same effect of lifting the expiration line?

    2) Do you have to hold the trade to expiration to realize the net credit rh? Arnt you going have to sell off the rh and incur gain or loss without holding the trade to expiration and the gain or loss from the closing of rh would have to deduct from the initial credit of rh?

    3) Any guides on what environment or dte approriate to do a rh?
     
  7. AKJ

    AKJ Well-Known Member

    ...sigh....

    venrcew, why don't you sign up for a trial of OptionVue or OptionNetExplorer - or build a simple excel spreadsheet - and observe for yourself the impact of certain trades on the expiration line.

    Some first order exploration and initiative will help you answer these questions you have.
     
  8. Ice101781

    Ice101781 Well-Known Member

    I've honestly been wondering the same thing for a while now!

    Why not Harvey when price is outside the tent and Reverse Harvey when it's close to your center strike?
     
    Last edited: Nov 7, 2016
  9. Trader G

    Trader G Well-Known Member

    I would have to dust off my 8 tracks of Dan Harvey's presentations but I believe it is called a Rev Harvey because Dan would do exactly what you are suggesting. Due to the trade someone mentioned (Sebastian maybe?) he might want to do the opposite and thus the rev harvey was born. If you look at the adjustment as simply a vertical trade on it's own I think that it can help you make the decision of what you want to do. On the rev harvey of the top of a put fly you are selling a put spread for pos. delta while the harvey is buying a put spread for neg delta. A pullback would benefit the harvey while a continued move up would benefit the rev harvey. If you are looking at the trade as a whole, rev harvey lifts the right side of the fly (but reduces the debit spread part of the fly), the harvey moves the debit spread part of the fly to the right but lowers the right side expiration line. Please excuse errors, I am doing this without the benefit of having my software open and so mentally drawing the pictures in my head of the adjustments. Plus it's Monday morning.
     
    Ice101781 likes this.
  10. DGH

    DGH Administrator

    Hi folks. It's always interesting to see my name bandied about. For purposes of clarification and simplification, here's the scoop. The "Harvey", a term coined by my friend Mark Sebastian of OptionPit, simply referred to a method I taught at a previous venue in which a condor which was getting into trouble was adjusted by rolling out the endangered short strike. The "Reverse Harvey" simply "brings in the wings" of a butterfly or condor by moving a long strike closer to the money, usually to preserve profit while holding the position a bit longer. I have modified the term now to refer mainly to the method of raising the right side of the tent of a BWB, as in the Road Trip trade, by "bringing in the wing" on the upside. In effect, this equates to selling a put credit spread as Trader G suggested.
     
    Ice101781 and Paul Demers like this.
  11. Ice101781

    Ice101781 Well-Known Member

    Trader G and DGH, thanks for the insights - the Reverse Harvey makes a lot of sense now, especially in the context of the RTT, where the debit is very small on entry.
     
  12. ACS

    ACS Well-Known Member

    John Locke spoke about the difference between adjusting the long of a butterfly down vs. the short up this morning in his Monday webinar. It's in the November M3 section near the beginning and worth watching when posted if you have access.
     
  13. Venrcew

    Venrcew Well-Known Member

    Does doing a rh on the lower bb bring the right expiration graph up?
     
  14. Trader G

    Trader G Well-Known Member

    No, you would be buying a put vertical (selling the lower long and buying a closer to the money put) so it would lift up the left side of your fly cutting margin and adding neg deltas.
     
  15. Venrcew

    Venrcew Well-Known Member

    The expiration graph would lift the NET credit amount from doing rh on upper and lower bb? People say do a rh with price not bearish but isnt that sufficient to trade directionally A guide to when to do rh during the trade duration?
     

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