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Reverse Harvey Options Income Butterfly Adjustment (Video)

Overview:

The video below walks through a Reverse Harvey adjustment that was made to the February CIB.  With the move lower in RUT, we had an open profit and it made sense to protect the position in case of a fast move higher.  The Reverse Harvey knocks in the wings of the Butterfly and reduces risk.  The downside is that we experience a loss of Theta, but the position is directionally “safer.”  The Results Spreadsheet has been updated.

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Enjoy:

The image below shows the risk graph following the adjustment:

RUT.FebFly

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  • ibon

    Hi Dan!
    Very interesting adjustment to this CIB. The positions risk profile looks much safer after the adjustment.
    My question would be if you were to consider this type of adjustment usually for CIB or is just this case in which looking the current technical aspect of the RUT graph you consider to do it with the aim of reducing the risk from a sharp upwards move from support.
    Thanks!

    • Dan

      Hi Ibon,

      Thanks for the comment! Yes, the position is directionally safer after the adjustment. This adjustment is something I always consider when it makes sense. In this case, the market is moving around a lot and I’m not sure where it’s heading. I’d rather take some risk out of the position and guard myself against a bigger move.

      You’re correct that this adjustment really protected the upside more than the downside and it looks like it might not have been the best choice, but that’s okay. We never know where the market will go and adjustments that reduce risk are good when we have a fast market. We’re seeing a lot of volatility come in and I’d rather sit in a trade knowing that whatever happens doesn’t matter as much. Hope that helps!

      Dan

  • sherin pat

    Hi Dan,

    Great explanation and great video as always. Thanks for posting it. It indeed reduces the risk and flattens the T+0 line nicely. I had done minor adjustment to Feb CIB earlier as a result I am not up in profit as much as you do. However, I had a risk on left side if market moves further. However, after watching your morning post, I applied this adjustment and my risk is reduced to just $720 on both sides and my trade would survive another 1 SD move without any significant loss tomorrow. Thanks again for posting this video!!

    Thanks,
    Sohil.

    • Dan

      Awesome Sohil, glad it helped! When the market starts moving fast (like it is now) I get more cautious and try to protect profits wherever possible. It looks like the overnight action is ugly again and I’m not too worried about it. In my mind, taking a smaller profit or scratching in the face of a big move is winning. When we trade that way, we can be around when the environment is more favorable. Thanks for the comment!

      Dan