The Tycoon Report

I’ve been involved in the option trading business since 1984 when I graduated from Iowa State University and took a job as a runner at the Chicago Board Options Exchange. My goal was always to become a market maker and trade my own money as an individual member on the floor of the exchange. I moved up from a runner to a phone clerk to a trade checker, took classes, and read books on how to trade. I always felt that traders and market makers had insights only learn by experience of managing risk. I took a job executing stock for market makers in the trading pit while they were trading options. I could see the mannerisms of brokers and traders as they both struggled to make money. I learned how to call and speak to brokers at the NYSE and the AMEX and how they prioritized their orders. I also learned that certain orders were electronically wired for execution. The day of the Crash in 1987 I was executing stock in the GE pit where options on GE, PEP, HUM, and BDK traded. One of market makers I did business for grabbed my tie and gave me a scale order to buy at total of 50,000 GE 10,000 shares at a time at eight in the morning. The trader executed stock through me every day so I had no reason to question his motive. When GE opened at 10:30 CST that morning I called the NYSE for a fill report and was told the orders were cancelled. Never saw that trader again but that October day clinched it I knew I could trade and make money. I took a job with a couple of market makers and every day I readied their position cards for them, dissected their trading positions and learned how they managed option inventory as a means of managing risk. Trades use their “Greeks” which is a derived number that aggregates risk and simplifies option positions. Traders understand every position they have on like someone doing a crossword puzzle understands how the puzzle comes together. Interviewed in New York City an took a job with a Bear Sterns group that was running a trading operation at the CBOE selling index premium versus being back spread in individual equity option position. I got a raise to nearly 23,000$ annually and got the opportunity to “go on a seat”. I was sent into the OEX and executed the “1 – 5 spreads” thousands of times (sell 5 options and trade 1 S & P future). The VIX was around 10 and the next day the world learned about a little Russian town of Chernobyl. The market fell apart so did the firm, and my first experience understanding how a hedge fund operates. Figuring I needed to hedge career risk because of my misfortune at Bear Sterns I started taking graduate courses toward an MBA. I quickly learned the world outside the trading floor differed greatly from my current work experience. Luckily I latched on with a designated primary market maker (DPM) and saw the exchange list the first options on OTC stocks. It was the beginning of multiple listing and an unbelievable increase in the number of options trades occurring at one time. It was also the largest position I’d ever seen being managed at one time. It was the electronic future, making paper trades, managing a position and simultaneously trading options on a stock trading electronically. Took a job with a small group of individual option traders that were primarily trading OTC stocks and learned how to properly put paper trading receipts into and computerized position management platforms. I’d put the stock an option position together, print out the risk analysis, and watch the traders manage inventory, trade and make money. Got a promotion, was leased a seat found crowd and began trading Synoptic, Biogen, and Ivax, and VLSI technology. Through the 17 years I spent in the same spot I managed to trade close to 100 different names. I usually traded back spread or long premium because as a market maker we felt we were always the last to know which direction a stock was going. Back spreading allowed us to scalp stock versus a name that moved before the open, during trading hours and after hours. IVX used to fund their stock buy-back sell the puts through Pershing twice a year. We loved it because we could protect our downside in case they warned earnings would fall shy of expectations. I’ll never forget the expiration Friday they warned earnings would be shy. Stock gapped down and IVX got the buy their stock and we profited as the puts exploded. As the technology bubble inflated the ability to manage more positions and traded large also increased. The frenzy over technology led to managing using a hand held trading and position management device. My average was 250,000$ a year with the proverbial career year at 800,000$. I always saved my money so that I could trade on my own and start my own firm. The Options Institute at CBOE asked individual members to volunteer their time after work to give tours to customers who signed up for seminars at the exchange. They also asked me to give a presentation to the individuals that were taking the new member exam and explain what to expect as a new member on the trading floor. Simultaneously I was spending a lot of time each morning teaching interns or clerks at our firm how to become a market maker. The ones that succeeded were the ones that continually asked questions and worked to understand what was working, how, and why it worked. When options and stocks started trading in penny increments it cut a market makers margin not in half but by a factor of 12. At the same time I volunteered for a CBOE committee to answer a 35 point questioner from the SEC to examine competition and “leveling the playing field”. The SEC was concerned about the conflicts of interest and the “payment for order flow” the exchanges competed for. In the end my seat lease was 5,000$ a month; my own commissions where 2,000$ and trading platform was 1,000$ and a quoting platform was another 1000$ and on top of that was payment for order flow of 12,000$ per month. I paid those expenses before I made a cent, and “heaven forbid” I make an error quoting because it would cost me too. I traded Soybean options at the Chicago Board of Trade for a summer. The price beans was between 5.50 and 6.25$ the whole time. If you want to make markets here you need to get a little lucky and have the product in vogue. I’ve taken my experience and my trading to the next level. I’m teaching options and trading at the same time. I evolving into an off floor trader and using the secrets floor traders have taught me over the years. I can therefore easily distinguish between what makes floor traders profitable and pass that experience along to everyone. The current environment for option and stock trading has never been fairer for customers. The technology for risk management and market width has never been more in your favorable. The next economy will require technologic sophistication and virtual trading crowds. I find a new innovation that helps my trading every day. This program is an MBA and your next career at the same time. It’s the business model that is in the way of the technologic future.

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