Brian Larson - Rhino trade

Ron Bertino

Administrator
Staff member
Recording:

Slides

Additional recording:
October Rhino




Setup:
  • Underlying: RUT
  • enter at a DTE between 56 to 84
  • Planned capital: $25,000
  • Profit target:
    • > 35 DTE: $2500; 10% of planned capital (average profit is 5% to 6%)
    • 28 - 35 DTE: $2000 (8%)
    • 21 - 27 DTE: $1500 (6%)
    • < 21 DTE: $1000 (4%)
  • Max loss: $2500 per tranche (10% of planned capital)
  • starting structure:
    • 5 x 50/40 put broken wing butterflies, with upper long strike at 5 to 15 points ITM
    • will usually start with slightly negative delta
      • When the delta is low (less negative), it means that the IV is up a bit
        • This is because the Delta curve becomes flatter with increasing IV - the Deltas of ITM option decrease while that of the OTM options increase. The net effect in the BWB is that the increase in the positive Delta of the two short OTM options plus the decrease in negative Delta of the ITM option is greater than the increase in negative delta of the far OTM option
      • In high IV conditions the BWBs cost less as the premium curve (like the Delta curve) becomes flatter. However, unlike the Delta curve where ITM options Deltas decrease & OTM Deltas increase to flatten the curve, the premium for both ITM & OTM options increases. The flattening occurs because the increase in premium for the OTM options is greater than the increase in premium of the ITM options. The BWBs cost less because the premium of the two shorts increases more than the increase in the premium of the two longs.
  • ideal technical analysis setup:
    • The best entry would be a market that's moving down (so vol is already up), but HASN'T reached support yet. It would be nice for support to come in at or below the short strikes, so that delta will go just a little bit positive, and then bounce back up through the shorts as vol collapses. Also, if you've just had a down move and bounced hard off support, it can be a good time to enter.....vol should still be somewhat elevated, and a decent % of the up move may already be in the past.....a move in either direction from there would be pretty easy to handle most of the time.
    • He said his least favorite time to enter is in a strong down move. Even though the BWBs would be cheap, if price bounces way up after the entry (like 150 points), it is going to be a hassle chasing the price up.Brian prefers to enter by the calendar rather via TA. He says he has 5-6 different accounts. He has been entering the RUT at 77 DTE.
    • Entering if there is a strong up move will make it harder to lose, but since the BWBs will cost more due to low IV, it will be harder to reach profit targets
  • order entry
    • He recommends routing the order directly to the CBOE. When he has used “best routing” & wasn’t getting a fill & and then routed to the CBOE, he’d get the fill. He thinks that once TOS routes an order to another exchange because the latter is showing a better price, the order might be stuck there & not moved to another exchange. In contrast, he thinks IB might continually be rerouting orders

Adjustments:
  • adjustments are made one per day, typically at the end of the trading day
  • Although there are price & Delta adjustment points, Brian says the shape of the T+0 line & trader risk tolerance is more important. Therefore, if there is a downside move of concern, one can adjust before hitting the Delta or price point levels
  • price adjustment point:
    • if price > 10 points above the long strike of the original BWB:
      • add 5 more 50/40 BWBs
      • the second set of 5 BWBs should be placed 20 points higher than the original BWBs
    • if after adding the additional 5 BWBs you find that the deltas are too negative, then add some OTM call calendars with the center strike 30 points OTM
  • delta adjustment points:
    • upside adjustment:
      • if price is within the tent of the BWB:
        • if you only have the initial 5 BWBs: adjust when you hit -25 deltas with RUT
        • if you are fully scaled in with 10 BWBs: adjust when you hit -50 deltas with RUT
      • if price is outside the tent of the BWB (regardless of whether you are half or fully scaled in):
        • adjust when you hit -25 deltas with RUT
        • in OptionVue:
          • adjust when your second of five expirations lines (first expiration line above the T+0) crosses the zero line
        • in TOS or ONE:
          • take note of your DTE, and work out 25% of that number
          • move your projection date forward to the current day plus the number you determined above
          • adjust when that projection line crosses the zero line
      • upside adjustment (reduce negative deltas):
        • normal adjustment:
          • buy OTM call calendars in order to bring deltas back within guidelines
          • the center strike of the call calendar should be around 30 to 40 points OTM
          • the shorts of the calendar should be in the same expiration as the BWBs, and the longs should be in the next month out
          • don't change the position delta sign (keep deltas negative but within guidelines)
          • Note that the "sea of death" created by the calendar does not become an issue until expiration week
      • late in the trade:
        • if price is threatening to move beyond the calendars:
          • sell the calendars for a profit, and then use a call 50-30 BWB to flatten the T+0
          • set the shorts of the call BWB at around 10 to 30 points OTM
      • alternative adjustments:
        • roll the short calls of the call calendars higher, by buying a call debit spread
        • roll the short puts of the put BWBs higher, by selling a put credit spread
        • you could do an upside 50-30 BWB rather than the calendar
        • if early in the trade and you get a hard/fast move up, you can consider rolling one or both of the BWBs up
    • downside adjustments:
      • adjust when deltas go above +25 deltas with RUT (regardless of whether you are half or fully scaled in)
      • adjust if the daily bar closes below the expiration line (left wing of the Rhino structure)
      • downside adjustments (reduce positive deltas) :
        • if you have calendars: remove the upper BWBs or the upside calendars
        • if you are scaled in with 10 BWBs and have no calendars: remove upper BWBs
        • if you only have the original 5 BWBs: roll back the BWBs
          • this is essentially a "trade reset"

Exit:
  • exit at around 21 DTE



The planned capital for the Rhino trades will be $25,000. Since we will be overlapping 2 months most of the time, the account size is $37,500 (50% higher). As I manage these trades, I will keep an eye on both numbers and keep the total capital usage in line with the model. Sometimes, this may mean reducing the margin requirement in the front month in order to make an adjusment in the back month (or delaying a back month scale-in until the front month can be adjusted/closed) - this will be a good exercise in account management and capital reduction techniques as well. There will be times when month #3 is 77 DTE when the month #1 trade is still open. In this case, we will simply delay the entry of month #3 until we close month #1.

If you have a larger account or portfolio margin, you can decide to use the capital reduction techniques or not. If you have a smaller account and want to follow along, you can trade IWM (10X smaller), or some fraction of the published trades (40% = $10k, 60%=$15k, etc.). Just be aware if you choose to use a smaller fraction, there may be times when your trade is slightly different than the model account (because you can't buy/sell fractional contracts).



Brian's suggested tweaks for trading the Rhino on SPX:

I start with a 60 point front wing and 80 point back wing BWB, with the upper longs 10-20 points ITM.
Downside adjustments with a single, non-scaled position are done a little more quickly...usually once price is a bit past the short strikes and the delta is +10 or more. Simply roll the BWB back at that point.
On the upside, scale in when price is >20 points above the upper long. The scale-in BWB is 30 points higher.
The deltas guidelines are ROUGHLY +/- 20 or so, but it kind of depends on how the position looks. This is for a $25k account.
Similar adjustments using OTM call calendars and/or BWB's.



Sample starting position:
Rhino-01.png

Sample of scaling in with the additional 5 BWBs:
Rhino-02.png

If after you go full size you find that the deltas are negative for your liking, then you can reduce the negative deltas by adding some additional OTM call calendars with the center strike around 30 points OTM. Remember that once you get outside the tent, the delta limit is +25.
Rhino-03.png

Sample of having a fully scaled in position (including calendars) and then removing the upper BWBs as a downside adjustment (original position is in blue and the new position is in red):
Rhino-04.png



Comparing an upside 50/30 BWB to an OTM calendar, in order to hedge the positive deltas.
Rhino-05.png

Calendar:
Rhino-06.png

50/30 BWB:
Rhino-07.png



Results from Brian's backtests (from 2008 to the present) of the Rhino trade:
Rhino-08.png

Brian suggests that the average return would be 5% with a greater than 90% positive expectancy.



If you were to do nothing other than the Rhino trade, then since you would have two trades overlapping and you would invest 50% of your account into each of these two trades, then you can expect an overall account return of around 30%
Rhino-09.png



If you'd like to follow along with a paid trade advisory service for the Rhino trade, you can find it here.
 
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