Ah…Family Vacation. We all can relate to the idea of a “family road trip”. Don’t worry, I’m not going to bring up old memories from prior trips, but getting that bubble gum out of my twin sister’s hair with peanut butter while the dog helped out in the back of that early 1980s station wagon still makes me laugh.
So, what is a trader to do knowing they may be disconnected from the world for a period of time while on vacation? Closing all trades is an option, but there may be another way that may interest you. It is my understanding that the creator of this trade started with Dave Thomas. He called it the Parking Lot trade after his daughter who wanted a way to help pay for parking in downtown Seattle. From the Parking Lot trade we now have the Road Trip trade. There are various versions but I just group them as Curtis Allen and Dan Harvey trades. All in all, the trades have one thing in common. They are slow and reliable…just the thing you want when away.
Dan Harvey’s Road Trip Trade (taken from Capital Discussions):
Use SPX Put BWB.
Enter 65-75 DTE.
Exit 15-40 DTE.
Enter on a flat or down day where volatility is higher.
Place upper long 5 points higher than the market price, which is the same as entering short puts 35 points below the market price.
Enter lower long puts 50 points below, enter upper long puts 40 points above shorts.
Ideal entry price is below 100 but can go up to 125.
Try to leave the position alone for at least 30 days unless SPX has a large move.
If SPX is more than 30 points above upper longs then start rolling them down one-by-one to raise the expiration line above zero.
If SPX moves to the lower 1/3 of the tent early in the trade then either exit or buy debit spreads to protect the position. The long of the spread should be at the B/E point of the expiration graph and the short should be 20-25 points lower.
If SPX moves down later in the trade then exit.
Place a trade every two weeks.
Curtis Allen’s Road Trip Trade:
It’s essentially the same thing but with some minor adjustments.
Enter around 70-63DTE.
Enter short puts 35 points below the market price.
Enter lower long puts 60 points below, enter upper long puts 50 points above shorts.
Personally, I’m using a combination of both. For example, I prefer to enter using Curtis’ approach (60 / 50 entry). I will then adjust using Dan’s approach for the upside, but for the downside I prefer to roll the entire butterfly down if price is 20 points pass the shorts.
What have I learned from this trade? It’s a great trade that requires almost no maintenance especially during the first 30 days except if the price falls below the short puts of the BWB. You will then have to adjust accordingly or not. Also, I’ve noticed in my backtesting that the trade excels best in high IV environments. In low environments, it requires more attention as the T+0 line is not as flat.
Regarding losses, the drawdowns are some of the lowest I’ve seen during some of my backtesting and live trading. Presently, I have two live trades on (February and March) which are actually up for the year (referring to the first 10 trading days of 2016…the time of this blog), which is quite impressive given these first two weeks have been the ugliest two week start to a year ever.
Drawbacks: It can sit there for a long time and not gain value. I also found that in a grinding up market, you could spend the whole time in the trade and not make any money. You also have to watch your planned capital levels as the trade could require more especially on the upside adjustments.
What do we call this trade? It’s an unhedged M3 or M3U, but it sounds like everyone is calling it the Road Trip trade.
Here’s what a typical trade entry looks like using a 1 lot for the two types of trades:
Takeaway: If you are looking for a trade to complement your existing trades (most of my capital is in the RUT M3 trade), you may like this trade especially in another underlying like SPX. It is also a trade I’ll look to beef up when I’m away for a while.
Written and contributed by John Wilson