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 Stocks & Commodities V. 35:02 (22–27): A Road Trip With Options Supertraders by John A. Sarkett

N
early a decade ago, a
headline in a promi-
nent financial pub-
lication named Dan
Harvey “the super
trader of index condors.” I
know—I wrote the piece. Re-
cently, coming across some old
notes, I wondered what became
of him, and with a little digging,
I was able to renew contact.
Turns out, some 10 years
later, working with partner
and options veteran Tom Nu-
namaker, Harvey had moved on
from condors to a new options
trade model that he calls the
road trip trade (RTT). The
partners believe it is more
consistently profitable while
requiring less hands-on man-
agement (in the lingua of the
options trade, “adjustment”)
and thus affords more time for
road trips, hence the name.
The pair trades the SPX,
the index that follows the S&P
500, as well as ES futures
options and the Russel 2000
index (RUT), using the bro-
ken wing butterfly (BWB) as
the vehicle of choice. To this,
they add a sometimes coun-
terintuitive adjustment that
has been dubbed (not by him)
the reverse Harvey. That is the
“secret sauce” and a primary
and reliable means by which
profits are earned.
Goals are straightforward:
preserve capital, reduce screen
time to one or two looks a
The Secret Lives Of Butterflies day, and earn 7% to 15% per

A Road Trip With

trade.

A longer timeframe

Options Supertraders
roadscape: michael urmann/butterfly wing: echo/

Nunamaker and Harvey use

weekly options in the SPX
or ES futures. They choose
expirations 70 to 85 days out.
shutterstock/collage: nikki morr

The trades must pass a series of

Here’s a way to trade options that allows you to spend less time managing the trade and filters, or “entry guidelines,” to
more time to go on road trips. be launched. They plan ahead
to exit 15 to 20 days before
by John A. Sarkett expiration.
They add a new RTT posi-

Copyright © Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 35:02 (22–27): A Road Trip With Options Supertraders by John A. Sarkett
OPTIONS

tion every two weeks and typically Profit/Loss by Change in SPX Index Price
have four or five on at a time. This 30000 $
+240%
is time diversification—another way 27500 487/12,732 = 3.8% T+80 +220%
of spreading risk and this in turn 25000
T+65
+200%
T+0
helps create a smooth and highly 22500 Debit is under 5% of margin +180%

desirable cumulative equity curve. 20000 +160%

17500 +140%
Another benefit of this approach: 15000 +120%
low drawdowns and the ability to 12500 +99%
sleep well at night no matter what’s 10000 +79%

taking place in the market. 7500 +59%

That’s the theory and perspective.

5000 +39%
2500 +20%
Mechanically, here’s how it works: 0 0%
The traders start the trade with a -2500 -487 -20%

broken wing butterfly (BWB) with -5000 -39%

the highest strike placed behind the -7500 -59%

-79%
market (Figure 1). For example, if the -12500
-10000
-99%
-12,732
SPX was at 2000, the BWB might -15000 -120%
be placed at 1975/1930/1875. That
1894.50 1909.50 1924.50 1939.50 1954.50 1969.50 1984.50 1999.50 2014.50 2029.50 2044.50 2059.50 2074.50 2089.50 2104.50 2119.50 2134.50
-8.9% -8.2% -7.5% -6.8% -5.0% -5.3% -4.6% -3.9% -3.2% -2.4% -1.7% -1.0% -0.3% +0.4% +1.2% +1.9% +2.6%

is: long a 1975 put, short two 1930

FIGURE 1: broken wing butterfly (BWB). When placing the BWB the highest strike is placed behind the
puts, and long an 1875 put. market. There’s more risk on the left side of the graph (lower wing) and less to the right (higher wing).
Notice that the distance between
the 1975 and 1930 is 45 and the
distance between the 1930 and 1875 Profit/Loss by Change in SPX Index Price
is 55. Thus, there is more risk to the 36000 $
downside of the short strikes than 33000 T+37
to the upside. This is what gives 30000
T+19
T+0
the trade model its “broken wing” 27000 Before adjusting
characteristic: more risk on the left 24000
After adjusting
side of the graph (lower wing), less 18000
21000

to the right (higher wing). 15000

A typical butterfly that is sym- 12000
metrical and balanced would have 9000

the outer long strikes equidistant 6000

+654
from the short strikes in the middle,
3000
0
for example, 1950/2000/2050. The -3000
amount of maximum risk, then, -6000

would be the same if the SPX went -9000

to zero or 10,000.
-12000

Note here that they are start- -18000

-15000 Margin nearly the same
ing behind the market with the 1856.50 1876.50 1896.50 1916.50 1936.50 1956.50 1976.50 1996.50 2016.50 2036.50 2056.50 2076.50 2096.50 2116.50 2136.50 2156.50 2176.50
-10.8% -9.9% -8.9% -7.9% -7.0% -6.0% -5.1% -4.1% -3.1% -2.2% -1.2% -0.3% +0.7% +1.7% +2.6% +3.6% +4.5%
butterfly. Most options mentors
FIGURE 2: BWB after concerted up move. The reverse Harvey adjustment rolls in the long strikes to create
or authors teach placing the short a credit and generate a $654 profit. Simple, but counterintuitive.
strikes right at the market, and
then adjusting from there. There
are distinct advantages to the road trip trade placement, as achieve profitability to the upside by adding adjustments that
you will soon find out. lift the T+0 line down the road. (T+0 means time plus zero,
The timing of the entry is not critical, but the pair prefers or today’s real-time profit or loss. T+7 is the expected profit/
a down day when volatility is up because volatility tends to loss in seven days, for example.)
be mean-reverting over time and because the butterfly will Size is typically 5x10x5 or 6x12x6 contracts, but the strategy
usually be cheaper with a spike in volatility. is easily scalable to larger sizes. Trading a two or three lot,
such as 2x4x2, is also possible, and adjustments tend to be
Price matters even less frequent.
Price is important, too. The entry debit must be less than 5% Once the initial trade is on, the SPX is closely monitored.
of the initial margin. For example, if there is $10,000 risk Harvey says, “We measure price movement relative to the
to the downside, the cost of the broken wing butterfly must launch price of SPX or ES and do an ongoing analysis of the
be $500 or less. If it is higher, it will become too difficult to volatility smile curve, specifically with regard to steepening

Copyright © Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 35:02 (22–27): A Road Trip With Options Supertraders by John A. Sarkett

slope or curve irregularities. Also,

Profit/Loss by Change in SPX Index Price
$
35000
we monitor other market data in-
32500 T+72 cluding the CBOE Volatility Index
30000
T+36
T+0
(VIX), CBOE VIX of VIX (VVIX),
27500 CBOE SKEW Index, historical and
25000
implied volatility levels, and VIX
futures.”
22500
20000 Before adjusting
17500 After adjusting With a more or less sideways
15000 market, the traders are purposely
12500 slow to adjust. Typically, this is the
10000
“normal” state of affairs. Sans big
7500
5000 up or down moves (some market
2500 analysts maintain the market tends
0 to move sideways 80% of the time)
-2500
in the first 21 to 30 days, they will
strive to “leave it alone and let theta
-5000
-7500 Margin reduced
-10000 (options decay) do its job and start
1868.70 1883.70 1898.70 1913.70 1928.70 1943.70 1958.70 1973.70 1988.70 2003.70 2018.70 2033.70 2048.70 2063.70 2078.70 2093.70 2108.70
-6.0% -5.3% -4.5% -3.8% -3.0% -2.3% -1.5% -0.8% 0.0% +0.8% +1.5% +2.3% +3.0% +3.8% +4.5% +5.3% +6.0% accumulating profits.” That is the
FIGURE 3: MARKET MOVES DOWN. A reverse Harvey put debit spread is added to flatten the T+0 line and “buy
optimal period for going on a road
time,” hoping the market can recover and stay “under the tent.” trip.
In addition, to boost premiums and
profits, they layer other, “smaller”
trades on top of the basic road trip trade if SPX or ES
moves up sharply after the trade is launched (Figure 2).
These are generally:
It’s better to trade on a down
day when volatility is up because • small butterflies just outside the expiration tent
volatility tends to be mean- • put credit spreads (usually with a 10 delta short
strike), or
reverting over time and the • an iron condor.
butterfly will usually be cheaper
with a spike in volatility. It takes a large market move to catalyze further ad-
justment on the large butterfly. A large down move will
typically cause the pair to add a long put debit spread,
which is more resilient to whipsaw
than a straight long put (Figure 3).
Profit/Loss by Change in SPX Index Price Removing emotion from the mix,
$
32500 +210% they don’t decide to do this in real
30000
T+71
T+36
+190% time, by the way. The protective order
27500
T+0
+170%
to add a put debit spread is entered
in advance as a good-till-canceled
25000 +160%
22500 +140%
20000 +130% (GTC) conditional or “trigger” order
17500 +110% at the SPX price point near the short
15000 +95% strike where the risk curve starts to
12500 +79%
turn back down from its high point
in the middle of the profit zone. A
10000 +63%
7500 +43%
5000 +32% further move to the downside might
2500 +16% prompt the addition of one more
0 0%
debit spread hedge prior to exiting
or repositioning the trade.
-2500 -16%
-5000 -32%
-7500 -48% What if the market makes a whip-
-10000 -63% saw move back up—and tends to stay
-12500 -79%
1842.20 1857.20 1872.20 1887.20 1902.20 1917.20 1932.20 1947.20 1962.20 1977.20 1992.20 2007.20 2022.20 2037.20 2052.20 2067.20 2082.20
up? They manage this by taking off
-6.1% -5.4% -4.6% -3.8% -3.1% -2.3% -1.5% -0.8% 0.0% +0.8% +1.5% +2.3% +3.1% +3.8% +4.6% +5.4% +6.1% a put debit spread if the price falls
FIGURE 4: SOMETIMES YOU JUST HAVE TO TAKE A LOSS. The trade is exited as it is “behind the tent” for a $200 to 50% to 75% of the debit paid,
loss, against a string of $1,000 winners, and so the mathematical expectancy of the model is maintained. from either time elapsed or a market

Copyright © Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 35:02 (22–27): A Road Trip With Options Supertraders by John A. Sarkett
OPTIONS

move higher. For example, if a put Profit/Loss by Change in RUT Index Price
debit spread costs $2 they would $
30000 +240%
consider selling it when it declines 27500
T+70
+220%
$1.50 to $1.00.
T+60
25000 T+0 +200%
The current P/L is monitored 22500 +180%

constantly. The traders will exit a 20000 +160%

position if the loss exceeds 4% to

17500 +140%
15000 +120%
5% of utilized capital (Figure 4). 12500 +99%
They consider a situation like this 10000 +79%

“one of the best trades” even though 7500 +59%

a loss. Consistent gains combined

5000 +39%
2500 +20%
with very small and infrequent 0 0%
losses increase the mathematical -2500 -20%

expectancy, the point being to stay -5000 -39%

in the process, week after week, and -7500 -59%

-79%
not get obliterated. This is a key to
-10000
-12500 -99%
their relative longevity and success- -15000 -120%
ful track record.
1109.30 1121.30 1133.30 1145.30 1157.30 1169.30 1181.30 1193.30 1205.30 1217.30 1229.30 1241.30 1253.30 1265.30 1277.30 1289.30 1301.30
-9.0% -8.0% -7.0% -6.1% -5.1% -4.1% -3.1% -2.1% -1.1% -0.2% +0.8% +1.8% +2.8% +3.8% +4.8% +5.8% +6.7%

FIGURE 5: BABY BUTTERFLY. As the market moves higher, you add a “baby butterfly” to the right of the initial broken
The reverse Harvey wing butterfly. Over time, it raises the T+0 line and position profitability.
What if the market makes a large up
move after the 21–30 days? Harvey
will use a move that was named in his honor (by options
trader Mark Sebastian)—the reverse Harvey, a nifty
and counterintuitive piece of market jiu-jitsu. Here’s
how it works. The reverse Harvey can be
The long wings are rolled in toward the short strike employed to cut risk and margin
in order to generate a credit, and “lift” the T+0 curve to requirement not just with
the right of the “tent” (the profitability zone in the risk
curve). The reverse Harvey (RH) process is continued
butterflies, but also with other
gradually, if necessary, until the right side of the ex- options spreads such as iron
piration curve is lifted above zero as in Figure 2. This condors.
technique serves to generate at least a small profit even
in the event of a sustained and unrelenting rally. Many
other butterfly strategies lose money in sustained rallies,
but the RH process seeks to preserve positive expectancy
by generating a profit even in strong
upside markets. In addition, it avoids $ Profit/Loss by Change in SPX Index Price
the labor-intensive and expensive 6300 +81%
process of completely repositioning 5850 T+18 +75%
T+9
trades during these markets. 5400
T+0
+70%
4950
“We are not really making money
+64%
4500 +59%
on the spot when we are doing a 4050 +52%
reverse Harvey, even though we are 3600 +45%

receiving a credit,” Harvey notes. 3150 +41%

“We want to ‘let the butterfly be

2700 +35%
2250 +29%
the butterfly’ for as long as possible, 1800 +23%
but if the market is going to grind 1350 +17%
higher, we can extract profits along 900 +12%

the way, and even achieve a state 450 +6%

0%
where there is no longer any risk
0
-450 -6%
to the upside. That is the impetus -900 -12%
behind the reverse Harvey.” -1350 -17%

What if the market continues to -1800

2060.40 2075.40 2090.40 2105.40 2120.40 2135.40 2150.40 2165.40 2180.40 2195.40 2210.40 2225.40 2240.40 2255.40 2270.40
-23%
2285.40 2300.40
grind higher, as has often been the -5.5% -4.5% -4.1% -3.4% -2.8% -2.1% -1.4% -0.7% 0.0% +0.7% +1.4% +2.1% +2.8% +3.4% +4.1% +4.8% +5.5%

case since 2008? Harvey will layer FIGURE 6: IRON CONDOR. A long iron condor can also be layered in to increase profitability.

Copyright © Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 35:02 (22–27): A Road Trip With Options Supertraders by John A. Sarkett
in smaller trades at a higher level. For example, he will add a
so-called “baby butter,” a smaller-size butterfly to the right of
the main position on the risk curve (Figure 5). For example, if
the main position is 6-12-6 contracts, the “baby butter” would
be perhaps a 1-2-1, a total of four contracts. Over time, this
can boost returns with a very little increase in margin.
Harvey notes the reverse Harvey can be employed to
cut risk and margin requirement not just with butterflies,
but also with other options spreads such as iron condors
(Figure 6).
Interestingly, especially when the trader is long in the trade,
the reverse Harvey can often be achieved for a relative few
dollars. For example, a lower long put price might have col-
lapsed to 0.10–0.20, say, and the trader can roll up to higher
strikes for not much more, thus cutting the risk and margin
on the trade substantially, often as much as 50%. Again, this
does dampen maximum profit potential (the high point of the
butterfly triangle), but only slightly.
To summarize, the up market reverse Harvey rolls in the
wings toward the short strike and generates a credit. The down
market reverse Harvey adds a put debit spread. Both flatten
the T+0 line. They are done as partials of the main position
as the market moves.
Low risk, high rewards
Complexity increases, too, in the sense that you wind up with
more strikes than the original three, and each of those with
Risk/reward definitions
Calmar ratio—The Calmar ratio is a comparison of the av-
erage annual compounded rate of return and the maximum
drawdown risk of commodity trading advisors and hedge
funds. The lower the Calmar ratio, the worse the investment
performed on a risk-adjusted basis over the specified time
period; the higher the Calmar ratio, the better it performed.
Generally speaking, the time period used is three years,
but this can be higher or lower based on the investment in
question.
Sortino ratio—The Sortino ratio is a variation of the Sharpe
ratio that differentiates harmful volatility from total overall
volatility by using the asset’s standard deviation of negative
asset returns, called downside deviation. The Sortino ratio
takes the asset’s return and subtracts the risk-free rate, and
then divides that amount by the asset’s downside deviation.
The ratio was named after Frank A. Sortino.
Profit factor—The profit factor is defined as the gross profit
divided by the gross loss (including commissions) for the
entire trading period. This performance metric relates the
amount of profit per unit of risk, with values greater than 1
indicating a profitable system. As an example, the strategy
performance report shown in Figure 1 indicates the tested
trading system has a profit factor of 1.98. This is calculated
Copyright © Technical Analysis Inc. www.Traders.com
a varying number of contracts. This is by design, remember,
and Harvey calls it “inventory.” As such, it is imperative that
you not do it too quickly, or too big vis-à-vis the original
position.
Next time, I’ll discuss a method that trader and educator
Jim Riggio, who currently specializes in options butterflies,
uses for covered calls.
John A. Sarkett is the author of Option Wizards: Real Life
Success Stories From The Financial Markets And Market
Mentors (http://option-wizard.com). More on Tom Nunamaker
and Dan Harvey can be found at capitaldiscussions.com and
roadtriptrade.com.
Further reading
Sarkett, John [2012]. “The Queen Of The Iron Condors,”
Technical Analysis of Stocks & Commodities, Volume
30: July.
[2009]. “Adjusting Option Trades With Bill Ladd,”
interview, Technical Analysis of Stocks & Commodities,
Volume 27: Bonus Issue.
[2009]. “Sizing Up For Success,” Technical Analysis
of Stocks & Commodities, Volume 27: December.
by dividing gross profit by gross loss.
Probability or risk of ruin—The probability of an individual
losing sufficient trading or gambling money (known as
capital base) to the point at which continuing on is no longer
considered an option to recover losses.
The risk of ruin is calculated by taking into account
the probability of winning (or making money on a trade),
the probability of incurring losses, and the portion of an
individual’s capital base that is in play or at risk. It’s also
known as the “probability of ruin.”
Mathematical expectancy—The return on an investment as
estimated by an asset pricing model. It is calculated by tak-
ing the average of the probability distribution of all possible
returns. For example, a model might state that an investment
has a 10% chance of a 100% return and a 90% chance of a
50% return. The expected return is calculated as:
Expected return = 0.1(1) + 0.9(0.5) = 0.55 = 55%.
It is important to note that there is no guarantee that the
expected rate of return and the actual return will be the
same.
—John Sarkett
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