The Road Trip Trade (RTT) is essentially a Broken Wing Butterfly (BWB) with a no roll risk off adjustment strategy. This strategy is a part of M3 concept, therefore, it makes it hard to “compare”. So I’ll discuss some common differences in the common understanding of each trade.
The M3 is a synthetic BWB strategy also. So the entries are similar.
Breaking the trades into 3 phases; entry, adjustment strategy and exit
The M3 ENTRY would be more resilient to explosive moves (up and down) and normal down moves assuming same days to expiration (DTE) and Delta number. There is always a tradeoff and the tradeoff is more draw down on the m3 entry with the slower grinding up moves. This can be overcome in the M3 with the M3U configuration but then you create the drawback of the RTT. We give you this option in the M3 program so you can experiment with both and experience the plusses and minuses.
The RTT also uses strict entry criterion when it comes to price. In many of our advanced programs we talk about “good entry days” and opportunistic entries on the M3 so this is the same concept.
Adjustment strategy: I’ll only discuss the up strategy for now, the down strategy is too long a topic…
The RTT up adjustment strategy is a risk off adjustment strategy by rolling in the upper long put. This adjustment is an adjustment we use in the M3 program but it is used as a loss minimalizing technique rather than something to make more money. The adjustment essentially reduces tent size and results in nearly no profit in up trending markets unless you happen to hit a down cycle OR unless you are extremely aggressive rolling in the upper long, in which case the trade takes on significant down risk. So you are left with the choice of taking your break even or small loss and hoping the market has a very large well-timed reversal or try and eek a small profit by raising the line and lose in the reversal.
The “standard” adjustment strategy on the M3 is risk off via widening the short strikes and thus widening the tent and raising the t+0 line… and then rolling up if needed to keep the larger profit zone closer to the asset price allowing a reasonable profit with a more normal market retracement. Of course, the trade-off is that a harsh pull back late in the trade might give a bonus profit in the risk off only strategy (RTT) and result in a loss on the roll-up strategy. Of course, the RTT can also lose during the late pull back when the risk off adjustment is too aggressive.
Also, the RTT is actually using this roll up/down strategy if the market is moving, by using time staggered entries. Keep in mind the RTT can get quite active being in 4 different trades when the market is moving.
The way Dan Harvey is trading the BWB, he is pulling the trade at the first sign of risk, which can be applied to M3 as well. You can get into some trouble trying to force the trade to work.
The point of the M3 being a learning exercise, that is true, most people take the concepts in the M3 program, fool with the various adjustment strategies, find the way they like to trade most, embrace the concepts they like and end with something like a Kevlar, Rhino, CIB, Weirdor or Road Trip Trade.
When it comes down to it, these types of trades are all very similar. They will all work well in a wide variety of conditions but none is the holy grail.
The point behind the M3 is that once all the lessons are internalized, YOU can create the trade that works best for you while having the knowledge to change the trade when the market conditions call for it.
Can I therefore say that M3 serves as the foundation. When the foundation is firmly grasped, other variations (Kevlar, CIB, etc etc) can be created and adapted according to each individual’s preference and style.
The benefit of RTT to me is at the outset it can be entered to give a small profit on the upside. In that case, if the market grinds up, stays put, or corrects 2-3 % fast and then bounces violently back-all typical conditions of the post 2012 market- you can be very relaxed with no adjustments for a long time, and expecting the small profit w/o any ‘reverse Harveys’.
And when done sequentially ie every 2 weeks, as markets grinds, gyrates, total position has a good range of profitability at any point in time.
I believe having the small profit in these conditions is a major benefit of this trade to M3, where one frequently seems to end up chasing a grinding market up with a small loss, and having to be in the trade to the very end, with increasing chance of a fast reversal to get the cheese. Obviously RTT is entered over 2 month to expiration, and has much smaller gamma through typical duration of the trade-where its name comes from-, and this also gives more peace of mind, while requiring patience.
Omar,
Many traders see a demonstration of someone trading an M3 concept trade and mistake it for a “trade” rather than “a system to allow traders to learn how to trade”.
The M3 is what we call a broken wing butterfly T+0 profile position that is flexible as the way it is entered, exited and adjusted. We do this in order to allow traders to experiment with various adjustments and techniques and experience how the various positions react in a relatively safe environment thereby determining the best methods for their personalities and various market conditions.
One of the many ways the M3 can be traded includes starting further from expiration, without a call and further behind the market. One of the adjustment techniques is rolling in the upper long (Reverse Harvey) while raising the expiration graph.
In other words, the RRT itself is within M3 concept, as are many other trades such as the Rhino, Kevlar, Bull Vs Bear, CIB and multiple others.
So when RTT type of entry and adjustment strategy is in favor, the trader is free to do so within M3 concept. But when the RTT type of adjustment strategy turns out of favor, and the RTT cannot get a favorable entry, or is taking multiple small losses, or simply has no gains month after month, as it often does, our goal is that the M3 trader will recognize those conditions and know how to correct it by adapting the strategy closer or further from expiration, or shifting into a more “typical” M3 configuration, or a Rhino or CIB type of configuration to keep returns more constant in a wider variety of markets.
I have been using a 50/60 wing SPX version of this trade for over a year now. It took a while to develop an appropriate downside adjustment, but handling the upside has been far easier than managing an M3. Just a lot less work. I agree that the almost immediate profit I experience is a nice buffer against market moves against me. It should also be mentioned that this is a 70+ day trade, which makes it different from most M3 configurations. I use it for consistency and low stress. Dan Harvey was my last mentor at Sheridan, and he is a lazy old dude like me. For us, all of life is a Road Trip!