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The working of bb adjustments

Discussion in 'Options' started by Venrcew, Aug 9, 2016.

  1. Venrcew

    Venrcew Well-Known Member

    How does a doing a reverse harvey protect profit with market rally? Anyone has a simple numerical trade to show how profit is made? In a market rally the brought put would be further otm and closing them would realize the lost on the two brought put. And buying another two put lower would incur another debit. How would closing the put at a lost protect profit?

    How do you know what situation is good to do a RH during the duration of the trade?

    Thank you
     
    Jose Perez likes this.
  2. Capt Hobbes

    Capt Hobbes Well-Known Member

    Don't think in terms of individual options, there are too many moving parts this way. Think of RH as selling a vertical layered on top of the original position. If you bought your original butterfly for X dollars, that X is your upside risk. If the market runs up above the long and you do nothing, the fly expires worthless and you have lost the entire X. If you do a RH, you can think of it as still holding the original fly plus a credit vertical with the short at the upper long of the fly. Now in the same rally scenario, you still lose X on the original fly but you keep whatever credit you got for the vertical, so your net loss is less. If over the lifetime of the trade you layer enough such verticals, your net on the upside becomes a win.

    When to do a RH is what makes a strategy. You would have some sort of a rule, typically based on the risk graph of the trade. Being a bull vertical, a RH improves the upside and hurts the downside, so the rule would tell you when to make this tradeoff.
     
    tman and Rtb like this.
  3. Marcas

    Marcas Well-Known Member

    RH is not that hard. Rather than breaking it down think what RH does to your position. Lets say you have put BFly. Time passes and market goes up. You are sitting on your T+0 somewhere on small profit (or small loss for that matter - doesn't matter). Below you there is expiration line so as time keep passing you're going there (down). To protect what you have you can do RH. It will bring expiration line higher, hopefully above your current location, so you can earn even more money. Sweet.
    But.
    What RH will also do it will lower your expiration line on left from BFly body way lower, so if market decide to go down you will be in danger of bigger loss then you like. You will not be as protected to downside as before.
    So when to do RH? Very simple: do it when you know that market wont go down. :)
    Seriously now, when to perform RH depends on you, your style of trading, how much you want expose yourself to risk, how much you want to protect. It also depends on your entry point - how much did you pay for org BFly (how low is your exp line) and how much DTE left, and how do you feel today, and how much time can you sped watching it and so on.

    Have a happy trading.
     
    tman and Rtb like this.
  4. DGH

    DGH Administrator

    I essentially agree with Marcas and Capt Hobbes. One of the features of the RTT Alert Service is to permit subscribers to benefit from our experience in timing RH maneuvers. Tom and I have fairly specific criteria and parameters as well more than 20 years experience (each) in trading butterflies of all kinds. Of course, there is always some degree of subjectivity involved. In addition, we offer layered trades which are superimposed on the original butterfly. Finally, we also have strict criteria for evaluating the initial butterfly for its efficacy and relative safety.
     
  5. Venrcew

    Venrcew Well-Known Member

    Capt Hobbes have some qns 1) Does the RH require traders to hold the trade to expiration inorder to realize the profit of RH. Trades close after the RH in market rally would realize the profit from RH? 2) Does the amount of lift of the graph depends on the amount of the credit spread on RH? 3) Does trade need to have some profit in order to do a RH or else doing RH would need be beneficial? Still dont require get where the credit from RH is from in market rally where the the brought put are sold at a los and buying two put with debit. Say the two put you brought are original thirty ten total fourty dollar and market rally with the put price at 25 15. Doing a RH would close the put at -5 -5 total -10 neg los and buying two put require debit. All and all the original fourty dollar of brought put is paid for the trade and RH is doing is realize the los from the total fourty dollar debit. Marcas thank you for the guide you have on RH. DGH definitely would look into the RTT service but have to figure out on understanding the RH. Do you always use a same price width for the bb in trade? Thank you
     
  6. Capt Hobbes

    Capt Hobbes Well-Known Member

    No, you don't have to hold the trade to expiration. Expiration is simply the easiest thing to describe without actually showing risk graphs. Changing the the expiration PnL changes the dynamics of the trade. As Marcas described, the expiration line is like a magnet. On the upside of a typical BWB, you are sitting on a positive theta with current PnL greater than the expiration PnL. Which means the t+0 line is rising right now (positive theta), but that rise will eventually stop and the t+0 and your PnL will get sucked down to the expiration line (theta will turn zero and then negative). By raising the expiration line with a RH, you are moving the magnet up. With a big enough RH, you can even move the expiration line above the current PnL, meaning theta will stay positive all the way to expiration. Which is nice, but the tradeoff is that your position will always be negative delta and be hurt by any downside move.

    As for realizing a loss with an RH--that is not important at all. Increasing a realized loss with an adjustment always increases unrealized profit by the same amount. Think of it this way. At any time, your position has a current PnL, which is what you would get if you liquidated now. Current PnL is the total of realized and unrealized. When you make an adjustment, the current PnL does not change. It would be wonderful if it did, because then you could instantly make money risk-free by simply making an adjustment and then liquidating. The current PnL being the same means that the total of realized and unrealized profit before an after an adjustment is the same (ignoring slippage and commissions).

    So, realized and unrealized are just accounting categories. Say you are sitting on your original butterfly with a $300 current profit. Of that, $0 is realized and $300 is unrealized. If you decide to do a RH which locks in, say, a $400 loss, now you are sitting on a $400 realized loss and $700 unrealized profit for the total of the same $300. Your account's net liquidation value is the same before and after the adjustment. What is different now is how the trade will behave going forward, which is the reason for the adjustment.

    When people say they "locked in the profit" using a RH, they don't mean they increased their realized PnL. They mean the trade now has less risk losing money to market movement and the passage of time, and whatever profit has been made on time decay so far is less likely to disappear. But that profit is actually locked in as unrealized PnL. Options have a limited life span, so anything unrealized will be realized no later than the expiration.
     
  7. DGH

    DGH Administrator

    Hi Venrcew. While the information you receive on these general posts is often accurate (particularly what Capt Hobbes and Marcas said), I should caution you that there may be some posts which do not accurately represent the Road Trip Trade which was developed by Tom Nunamaker and myself. I wanted to develop a trade which would usually avoid adjustments for the first 15 to 30 days of the trade...hence my designation "Road Trip". Some of the posts on the web site are from individuals who have learned parts of the RTT "by the seat of their pants", but they have missed some of the invaluable nuances of the trade. I would encourage you to try the 15 day free trial which we offer. That way, you can review the archived videos, our tools, our History and OPEN tabs, and all the other features of the RTT Alert Service including our Daily Planner and the Daily Alerts. We have several videos which explain the RH in depth in a variety of situations which include freeing margin, elevating the "tent", adjusting greeks, etc. We also employ other layering strategies which are discussed in detail in the RTT Alert Service. If you choose not to join the Alert Service after the 15 day trial, that is not a problem.
     
  8. Venrcew

    Venrcew Well-Known Member

    Capt Hobbes the t0 curve is essentially pnl curve make up of realz and unrealz profit? Doing a RH would have a 400 los realz but say after the RH you decide to close out the trade with price remain same you would realz 700 profit and deducting the 400 los you would have realz the 300 profit? Another point is does the expiration graph suck in curve at a increasing rate with less dte and depends on the theta? DGH do you personally trade the rtt in low volaty environment and have some adjustment in volaty increase? Thank you
     
  9. Marcas

    Marcas Well-Known Member

    Venrcew, do you use any tool to visualize the trade or you do everything in your head and are strictly concentrated on RH? Even if you have no tool try to draw it on paper it helps.

    Let's say you have a put Bfly:
    (1) long at 80, (2) shorts at 100 , (1) long at 120.
    In this case if you want do do RH on upper long you place this trade:
    (1) long P at 110, (1) short P at 120
    this is a put credit spread.

    Upper wing will rise accordingly to credit you received, lower wing will be placed lower accordingly to applied Margin.
    And you can look at this new PCrSpr as separate trade, no doubt, but if you look at it as being one trade with PBFly you will see that Bflys body will protect yout PCrSpr when market moves down (if you want to see it this way) or that this new trade (RH) secures/improves profit in right wing (because it is not likely that you are anywhere below expiration line).

    I answer for question for Capt Hobbes. Yes t0 line, particularly point/marble/'you are here'_mark shows you current P/L. If this point is heading up your P/L grows, if it is heading down it decreases. You can use RH to control or reverse drop of P/L toward right wing of Bfly at expiration. (Speaking of my example, because you can find more usage for RH than this.) You are right, eventually that t0 line goes toward expiration at different rates (theta just shows how fast), but this not constant. In early phases of BFly trades t0 moves away from expiration graph, at least near the body of BFly.

    Just try to do what DGH suggested, sign in for RTT.
    or at least find some video showing how it is done, for example

    And I'm thinking of the same (signing in) just need to find little timefor this.

    'You can observe a lot just by looking.'
     
    Last edited: Aug 12, 2016
  10. Venrcew

    Venrcew Well-Known Member

    Have try to look at what are the good software to use
    Marcas say u do a credit sprd and a debit sprd on the upper and lower the lift would be the net credit of the two trade?
    You mention about the t0 moving away from the exp graph how do you determine how much the t0 move away andfor how many dte prior to move in towards the exp graph?
    Thank you
     
  11. Marcas

    Marcas Well-Known Member

    Any program. Thinkorswim is free if you have account with them, an I assume that many other brokers have something to visualize the trade. There should be also some on line tools for that. I know there are couple apps for android, but I cant recommend any as I dont know them. You can do it also with pencil and paper. I remember while ago I was using AutoCAD to draw and analyze expiration graphs :)
    Yes, t0 moves away from expiration graph on both sides of BFly body in early stages of the trade (you can imagine that this suction is so big inside body that it overcomes small suction from flat lines on wings, and range of this force decreases with time so suction from wings becames dominant force). For how long this last? I dont know. I have a slight idea but it depends of type of trade (how wide wigs are, DTE, iv etc.) that is why anu analytical soft will help - you don't have to calculate everything on paper. And be aware that even analytical soft wont give you perfect picture only rough idea how trade behaves.
     
  12. Venrcew

    Venrcew Well-Known Member

    Autcad ! Awesome Marcas
    Are there thumb of rules about what dte and volty level should be during trade duration to do a RH? With lesser dte the premium on the upper bb decreases. Doing RH on bb with a large debit or very otm bb maybe insufficient to bring the graph to above be
     
  13. Marcas

    Marcas Well-Known Member

    Venrcew, I was trying to help you understand what does it mean to secure profits by doing RH. I'm not right person to ask about practicals because my trading was quite different from what is prevailing on this forum. I'm learning too. I could _hypothesize_ about when to do RH, or say do do it when it make sense but you need a word from somebody with experience here.

    Hmmm... I like this advice... yes. definitely: Do it when it make sense. :)

    Take care.
     
  14. Venrcew

    Venrcew Well-Known Member

    Rh move the expiration graph but is the move due to the net credit or is due to the intrinsic value of the options?
     

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