Below are three sets of Rhino trades for April for three different accounts of mine. There are multiple tranches in each and the risk profile is a combination of several. I am not going to do any upside adjustments to any unless RUT breaches 1035 with authority.
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I started also putting on a new type of hedge trade called a “Space trip Trade” developed by Ron Bertino. This is essentially what ends up being a free hedge for large down moves but can also be an income trade in portfolio margin accounts where it takes very little margin. If the market stays neutral or falls, it’ll profit. The upside has little risk (-$600) and a 17% fall would produce 24k in about 4 months. The idea is to put on multiple tranches of this with both time and price diversity. It takes time for the profit hump to build and entering these periodically and @ different times and market positions, we should be able to get a nice hedge for our ATM trades like the Rhino and also produce some income on them as well. As time builds, we can remove our upside risk by rolling up the shorts a bit.
Here is what I have on below:
Regarding the Space Ship Trade:
How do you handle the trade setup with OptionVue? Ron’s guidelines call for the lower B/E point to be below the upper long Put. Which in OptionVue never happens.
What rules/guidelines do you use instead?
Also, you have varied the wing width and ratio (50/25 and 10/6 versus. 25/25 and 10/4). Would you mind to say a few words about the reason.
Thanks a lot.
Hi Uwe,
I use TOS to model the trades but I always enter my trades in OV for management. So I use Ron’s guidelines in TOS.
With the 50 point version you can keep a similar (almost exact) risk profile but for less commissions and less portfolio margin usage. It’s essentially a double version. Ron just did a video (available at CD) that explains this. Check it out.
Hi, I’m also on the Capital Discussions forum and came across your website a few months back.
I think Ron Bertino is a very bright guy, and his “Space Trip” trade is well designed…..and I have a small one on for June – thinking to use it as both a stand alone trade and a hedge to something I’ll put on in April (e.g. Road Trip).
I’m curious to get your take on two things:
1) Why you chose 50 point widths on the credit spreads and 25 point widths on the debit spreads (as opposed to all 25 point, or all 50 point).
2) I spoke with a friend of mine, Dave Thomas (he’s close with John Locke and coaches within John’s business), to get his take on this trade, and the major issue/flaw he saw with this trade is margin related. He says sure you can trade them with PM account or using ES futures options, and have multiple tranches on, but in the even of a very large gap/black swan event (e.g 3SD), one move could completely wipe you out. His preference is always to be in trades where he knows/accepts the exact downside risk (e.g. M3 or parking trade).
Would love to know how you approach this….as it seems your risk tolerance is a bit higher than Dave’s.
Best, Lee
Hi Lee,
1) A wider width means less contracts and that saves commissions and also lowers portfolio margin requirements. Basically same risk profile etc but you save some commissions since its essentially a double sized version with the same amount of contracts.
2) The devil is in the details. At first glance I thought the same thing. But after watching Ron’s video a few times and studying all of the analysis posted in our chat group, backtesting it and thinking about it, I’ve come to the conclusion that it’s a viable and effective hedge only once you’ve built up several time and priced layered tranches that have had some time to mature, creating a nice profit hump to the left of the trade. If Dave has watched and thought about it in the manner presented and still had the same opinion, I’d be very interested to hear his thoughts as I am sure Ron would.
If the market falls 10% soon after you put it on, you’ll likely get out unscathed or slightly negative and unlikely profitable, thus it’s not a hedge immediately in a 10% fall, but at least you wouldn’t be killed like you would in any ATM strategy. The idea is that after some maturity and several tranches, you’ll soon be able to profit (quite nicely) and withstand large 10-12% gaps to such an effect as to hedge your other ATM trades if positioned accordingly. Of course, you’re right, if the market gapped down 30%, you’ll have problems and that will be an ever-present risk albeit a small one, we have circuit breakers etc and I am most concerned with the 5-10% overnight gappage risk and I accept the risk if we should gap 20%+ in some insane world event. It is what it is, I guess. Now also I should mention, if you go further out, like 300 days, your gap tolerance is extremely large (like 15%+ large). My main motivation is planning to hedge against 5-10% gap risks.
T&T,
What are your opinion on
1) What are you going to do with a 30% gap down move? The stt would turn your hedge into a trade you would want to be in?
2) Say the market gap down on your new stt trade where there no profit what you going to do? The hedge is not there
Hi Vercwn,
1) The idea is that after 7-8 months, you harvested some STTs that are purely debit spreads and act as a hedge for all remaining STTs and your ATM trades (rhino, RTT etc). Historically, the worst open was during 911 (roughly 9%) and Black Monday 1987 (which actually only opened down 9%). An unharvested STT can easily handle that with ease. If a nuke went off somewhere, I would imagine a 10-20% move and that’s what we all fear with our ATM style trades. The idea is that the STT eventually will help mitigate that risk. I think Ron is coming up with a Black swan hedge as well. He won’t give any info on it until he releases his course. I am actively moving towards having harvested STTs on at all times.
2) I guess the risk is at the start when you don’t have harvested STTs to protect your newly created ones. If you had a massive gap down, you’d have to roll your STT structure down, hopefully at break even or a small cost. If it’s a 20% gap (never happened before) then you may be down.
The idea is to have layered STTs each and every month with 2-3 of them (by the end of your first 12 months) being completely harvested debit spreads. This is how I approach it. Even during 1987, there was a 15% drop the months preceding Black Monday.
Me personally, my ATM trades all have about 6% gap protection (all my trades move through the profit zone before experiencing the heavy risk). Yes, there have been 2 days in the last 30-40 years that opened 9% down ore more, and this worries me re risk but even then, a 9% move would have IV through the roof and the lower long would compensate that loss. I believe on average, my ATM trades would be slightly positive or break-even the way I manage them (unless it happened right when I opened a Rhino or something). This gives me time.
Hi T&T, thanks for your response!
I’ll talk to Dave again about margin on the ST trade, but my intuition is that he’s just personally not comfortable using PM/having more at risk than he’s willing to lose.
And as to your strike width on the ST trade, the question wasn’t why to enter with wider strikes (reduced commissions and PM margin) – I saw that too in the video. It was why do you have 50-point widths on the credit spreads and 25-point widths on the debit spreads (at least this is what you show on your OV chart). Why not 50-points all around?
Hi T&T, how would you adjust your space trip with market rally other than rolling up your puts?
And what are the rules you would use to start adjusting the trade to lift the debit amount and to how much price width per roll
Thank you
Add credit spreads while keeping the T+0 line appropriate. You should be able to get a break-even result by the end of it.