What's the difference between the SPX and ES trades?
Dan trades SPX with a planned capital of $25,000 per trade. Dan may occasionally exceed this but the total for five open trades will be $125,000 or less.
Tom trades ES futures options and uses $20,000 of maximum defined risk per trade, similar to RegT margin. Tom keeps the total maximum risk for five open positions to $100,000 or less. Because Tom uses the maximum defined risk, the trades are suitable for retirement accoutns, which normally have higher SPAN margin requirements. Tom trades his ES trades slightly more aggressively than Dan trades the SPX positions.
Do you provide trade details so we can follow along in our own option analysis software?
Yes. We have a tab with all open positions and open orders. Here's what it looks like:
The open positions show the current positions, Dan's optional hedges in the notes, and the adjustment history so you can see when Dan did each adjustment and what he did.
What is the margin required for one trade?
Each SPX butterfly typically requires approximately $1100 in margin. We recommend having a buffer and using approximately $1500 per butterfly so you have cash available for adjustments if needed. Because we can have five simultaneous trades on, a rule of thumb some traders use is one butterfly every two weeks for every $10,000 in your account. So a $30,000 account would put on a three lot every two weeks. Alternatively, you could use twice as many contracts every four weeks.
ES futures options use approximately $1000 or maximum defined risk per butterfly. SPAN margin is typically about 1/3rd of the RegT margin, or maximum risk for a position. If the market moves against the position, SPAN margin will increase. This is why Tom uses the maximum defined risk to setup his trades so the margin required will never exceed the margin available if the market drops.
How much should I expect to make?
The Road Trip Trade (RTT) (and other butterflies) are Forest Gump "Life is like a box of chocolates" trades. Your yields will normally vary from 2% to 15% on the maximum margin used during a trade's like with occasional small losses. Dan's highest was 22%, and it is theoretically possible to make even more if the trade finishes in the "sweet spot". Because we have multiple trades open at the same time, the yield on the entire account is lower than the yield on any individual trade. In grinding up bull markets, yields are the lowest, but still positive. Tom uses long calls in a bull market to enhance returns on the ES positions.
Our performance shows returns on the entire account. Other services show returns per trade and some assume you are using 100% of your capital in each trade which we don't do. Our Compounded Annual Growth Rate (CAGR) is generally around +15% to +20% per year on the entire account. This is also the return we have seen for client accounts Tom is trading but there is no guarantee of future returns.
Should position Deltas be long or short? What about the negative Vega. What about the risk?
The position Deltas and Gamma will always be OK at trade launch; otherwise, we would not have selected the trade. The actual option Greeks will vary according to your platform. Vega will always be negative and manageable. Trade risk is inevitable. The RTT behaves very well in nearly all markets and is very resilient to downside moves. Before he joined Capital Discussions, Dan Harvey received many emails from traders who were very pleased (some said "Amazed") with the performance of the RTT. They were especially impressed how it handles a moderate downside move with minimal damage and good recovery potential. However, a huge downside move may cause us to exit the trade to avoid a large loss. Any income trade is subject to being hurt by three or four standard deviation moves, and the RTT is no exception. We are very risk-averse, and we do our best to manage impending risk.
Can I get filled at your trade alert filled prices?
Some traders will get the same fills we do or even better. Others may not.
Here is our sequence for selecting the trade. First, we experiment with two to four combinations of strikes which we think would have excellent returns with manageable risk. Then, we watch the mid prices of these possible trades and how the prices move with the market. Then, we select the one we think is the best (and with a reasonable price) and send a "working order" alert. If the order is filled, we copy and paste the fill and send it as an alert as soon as we can. This is usually within 5 minutes of the fill.
The key point: GET FILLED.
The only scenario in which you might want to pass is one in which you can't get filled even at a dime or 15 cents above our fill. Yes, you will give a little to the market maker, but these trades have a high win rate, excellent expectancy, and some of the best yields we have experienced when taken in context with the simplicity of the strategy, its low draw downs, and its relatively few adjustments.
"RTT is low maintenance, suitable for those with a busy schedule or in a non-US time zone (I am based in the south of Spain), you don't have to spend your life in front of the screens (although I do keep an eye on the markets throughout the US session). Thanks for showing this strategy and for your efficient service!"
When did Tom take over the ES future options trades?
Tom took over the ES positions starting with the Feb 2018 normal montly expiration cycle.
Are you front running the trades?
No. Some trade alert services send out messages after they are filled, Dan and Tom post their working orders (W.O.) in real time. Dan and Tom send a message to subscribers with the working order. After the message is sent, Dan and Tom transmit their live orders via their broker platforms. Dan and Tom have the same chances of getting filled that you do.
Do I have enough time at the end of the day to get filled?
Some trade alerts send alerts out at the end of the day so it's nearly impossible for you to follow and get the same fills.
Dan and Tom don't do that.
Dan is normally done trading for the day within 2 to 2-1/2 hours after the market opens. The only exception is if the markets have a major move down.
Tom trades ES futures options which are traded nearly around the clock during the week. Occasionally Tom will send a message before or after normal U.S. market hours; however, most of the time his trades are during the first half of the U.S. market hours.
I'd like to know more about how you approach the position sizing and risk relative to allocated capital for this strategy. For example, how are you determining the realistic worst case scenario. Are you looking at an expected worst case based vs. theoretical worst case?
Both Dan and Tom are very risk-averse. Between them, they have more than 35 years of option trading experience, and they have certainly seen some scary markets. They routinely look at two standard deviations (SD) as a move with a "reasonable" likelihood, and they adjust and hedge accordingly. If you haven't watched some of their videos, please do so to get a feel of how they approach risk. If the market moves more than two standard deviations, then we consider that we are in a new "data set". Basically, we don't like to make more than one hedging adjustment (usually a long put), and if that doesn't work, we are out at either a small gain or small loss, depending on how much time has elapsed and whether any profit has accrued.
I am interested in suggestions for starting out with a smaller allocation, maybe between 25k-50K.
One of the many advantages of the RTT is its scalability. While we generally trade 10 or 12 lots (ex. 10/-20/10), it is possible to generate healthy profits with 3 to 6 lots, as several of our subscribers do. If you are concerned about using lower margin requirements, then you might simply try smaller lots and scale all adjustments accordingly.
What is the reasoning behind opening with even a small debit? Is that the sacrifice made to get the margin where you want or is there some other advantage? Is there a down side to opening with a negative debit? Is is going to bite me some day?
The rationale for the trade structure of the usual RTT (entered for a debit instead of a credit) is the relative flatness of the T+0, T+7, and T+14 curves. We have certainly done BWBs for a credit in the past, but we found we were hit too often when the market headed south. Since the curves slope downward very quickly when the volatility kicks up, it is easy to get underwater quickly. Then, it's harder to "make it back" if the market rallies or stabilizes. Launching the trade for a small debit gives me a little edge at the beginning, and it's really easy later on in the life of the trade to raise up the right side of the curve to lock in the profit. Then, "bringing in the wing" on the opposite (credit spread side) of the butter will maintain a close approximation of the starting margin while yielding a net credit. - Dan Harvey
"I have had more success with the RTT than any other income trade, so I would highly recommend it and your service! Thanks very much, Dan and Tom!!"
When Dan says a profit target of 10-20%, what's the percentage based on--Reg T risk or portfolio margin?
It's not unusual to make 10% on Reg T margin in a normal market, even after using additional capital to "Reverse Harvey" the upper side of the expiration curve in order to lock in profit. Yields of 6% to 8% are very common. However, if the trade finishes near the "sweet spot", even higher yields can be attained. Portfolio margin yields will be even higher, of course. Generally, my PM margin is a little less than two thirds of my Reg T margin.
During grinding up markets, volatility and yields are lower. Dan and Tom's approach is to be consistently profitable, even in sustained bull markets. Any profit is better than a loss. We expect to make 2% to 5% profit per trade in this market environment. Tom is more aggressive and adds long calls while we are in a bull market, which can enhance returns significantly.
Margin requirements can be controlled by "bringing in the wing" on the opposite side (credit side) of the butter. The cost to bring in the wing on the credit side of the butter is relatively cheap, particularly with only 30 days or fewer DTE.
Are the trades based on real trading or simulated trading?
Real trading. Dan and Tom both trade the RTT for their own accounts and for client accounts. The trade alerts we post for SPX are one of Dan's live account trades. The ES futures options positions are Tom's live trades.
Are the trades recorded?
Yes. All trades are fully documented and available to you as long as you are a subscriber. This includes the daily screen shot images, trade messages, and emails we send out. Trial members can only look back 30-days. Paid subscribers have no limitation on how far back in time they can go.
"It is a very high probability, straightforward, flexible, low maintenance (relatively) trade that can generate a consistent cash flow. Excellent trade for someone who can't spend all day in front of their computer."
Are the real time alerts sent out before or after you are filled?
Before. We send emails, SMS text messages and Slack messages to alert subscribers before we send the trade to our broker. We send messages after we are filled, cancel an order and after we are done trading for the day.
Can this strategy be used on other underlying instruments besides SPX and ES?
Yes. You could trade the Road Trip Trade on anything with a liquid option market including stocks, futures options or options on non-U.S. markets like the EUROSTOXX50 or DAX.