Character | Saliba, the option master who has made over $100,000 for 70 consecutive months

This article is compiled from Option House.

01

In Saliba's trading achievements, what is most impressive is not only the huge wealth he has accumulated, but also the process of how he achieved it. He has achieved his assets by using a model-based trading method and maintaining extraordinary risk control at all times.

Saliba successfully achieved returns exceeding $100,000 for 70 consecutive months. Only a few traders can become millionaires after successfully trading a few large orders, and even fewer can maintain their profits. Only one person can continuously maintain the huge income brought by two major events and continue to profit.

Tony Saliba came to the Chicago Board Options Exchange (CBOE) trading floor in 1978. After working as a clerk for half a year, Saliba decided to try trading on his own. He found another trader to sponsor him with $50,000, had a good start, but then suffered setbacks and almost self-destructed. After experiencing the feeling of hitting rock bottom, he changed his trading skills and began to build his success.

Saliba's trading style can be compared to swimming. Just be slightly better than treading water, making small profits day after day, while fully seizing the opportunity when rare huge trading opportunities arise with his option position structure. His wealth was largely built through such major events.

02

The following is Saliba's own account:

In the spring of 1979, the implied volatility level was very high because 1978 was a very volatile year. However, later the market did not make any progress, and both volatility and option premiums collapsed. Within six weeks, I had almost lost all my money, and the original capital of $50,000 was reduced to nearly $15,000. I even had thoughts of suicide.

Do you remember the plane crash that happened at Chicago O'Hare Airport in May 1979, where a DC-10 plane crashed and all passengers on board were killed? That was when I hit rock bottom.

During that time, I sought advice from more experienced traders on the trading floor. They said, "You must be disciplined and do your homework. If you can stick to these two things, you can make money. Maybe you won't get rich overnight, but you can make $300 a day, which will be $75,000 by the end of the year. You should look at it this way."

These words were like a light bulb suddenly turning on. I realized that this method of making small profits was what I should do, rather than putting myself in huge risks and trying to make a big profit.

At that time, I was trading options for Teledyne Corporation, and the market volatility was very high. So I turned to Boeing, where the market was more compact and narrower. I became a spread scalper, making only a quarter or even an eighth of a point per trade.

I strictly adhered to the goal of making $300 a day on average, and it worked very well. This period taught me strict control and discipline.

To this day, my creed is still hard work, doing thorough research, and strict discipline. I pass on this creed to my traders. Back to what I was saying earlier, at the same time, I still held a large spread position in Teledyne, and I was in the process of closing it out. If the market went up, that position would lose money. I had been trading Boeing for five weeks at that time, and one day, Teledyne suddenly started to rise rapidly. I quickly rushed into the Teledyne trading pool to close out my position.

I heard the floor brokers receiving orders, and I suddenly realized that I was responding to their bids. I applied the same trading strategy I used for Boeing to Teledyne, but instead of trading in increments of one-eighth or one-fourth of a point, I started trading in half-point or dollar increments.

I only traded one contract at a time. Those traders didn't like me doing that because they felt I was getting in the way of their trades. They preferred trading in large orders of ten or twenty contracts.

They always called me "One-lot." The person who made my life the most difficult was the best trader in the trading pool, and he had already made several million dollars, basically a legend of that era. He had been excluding and mocking me from the beginning. He made my life miserable.

In 1980, they introduced put options for the first time, and the leading trader who embarrassed me the most was very opposed to put options, saying they were bad for the options business and he didn't want to trade put options. I seized the opportunity and seriously studied what put options meant for us. I was one of the first market makers to trade put options. In fact, put options opened up a whole new set of strategies.

Guessing volatility still had to be accurate. However, we didn't need to focus on market direction because the spreads we traded were large enough. For example, an option might be overpriced because there was high demand for that option among member firms.

I used all kinds of strategies, and I considered myself a matrix trader. I traded all the products on the screen because everything was interconnected. However, the most basic strategy was to buy butterflies (a position with long or short positions at a certain strike price, balanced by a reverse high strike price position and a reverse low strike price position - for example, a long $IBM Corp (IBM.US)$ 135 call option, two short IBM 140 positions, and one long IBM 145 position), and then offset it with an "explosive position".

When I buy butterflies, I mean I go long on both wings. The risk is limited, and if the market doesn't move too far, time decay works in your favor. (Unless there is a favorable price movement or an increase in volatility, the value of an option decays over time. In relatively flat markets, the decay of the premium of an option with a strike price closer to the market price is faster than that of an option with a strike price further away, that is, the middle part of the butterfly decays faster than the wings.) Of course, I would try to buy butterflies at the cheapest price possible.

If I could connect enough butterflies together, my profit range would be very wide. Then I would add an "explosive position" in a further month.

What is an "explosive position"? This is a term I coined. An "explosive position" is a position with limited risk and open-ended profit potential that profits from large price movements and increases in volatility. For example, a position consisting of long out-of-the-money call options and long out-of-the-money put options is an "explosive position". The unified characteristic of this "explosive position" seems to be that when the market moves, the delta (the expected price change of the option position when the underlying market price moves by one unit) increases in your favor. In other words, I am betting on volatility.

I use butterfly spreads in the near month, where time is in my favor, while explosive positions are applied in the far or even farther months. Then I supplement the payment for the time decay of the explosive position through high-frequency trading.

In other words, the explosive position is used to bet on major market movements, and the money earned through high-frequency trading is used to pay the bills, which is the cost of time decay of the explosive position.

03

Here are some excerpts from the interview with Tony Saliba:

Q1: Why do so many people who trade on the exchange end up losing all their wealth?

Tony Saliba: I think the biggest reason is that people who trade on the exchange believe they are more powerful than the market. They are not afraid of the market and lose their self-restraint and work ethic. This is the mentality of most traders who fail miserably, and most traders on the exchange really work hard.

Q2: What is the biggest misconception the public has about the market?

Tony Saliba: They think "you can only make money in a bull market." With the right trading strategies, you can profit in any market conditions. There are enough financial instruments such as futures, options, and underlying asset markets for you to construct a reasonable investment portfolio to deal with any situation.

Q3: In other words, the public has a strong preference for bull markets?

Tony Saliba: Yes, this is a common bias among Americans: the market must go up. The government had no objections to algorithmic trading during the three-year bull market we experienced before, but suddenly, when the market started to decline, all the blame was placed on algorithmic trading, making it the primary issue.

For the general public, such as my parents and relatives, the biggest misconception is that they think they make money when the market goes up and lose money when the market goes down. People should take a more neutral perspective, such as: "I am bullish on this type of asset and bearish on another type, but I need to control the risk of my bearish position because the risk is unlimited."

Q4: How do you deal with periods of losses?

Tony Saliba: How do you lose money? Either the market conditions are bad or the positions are bad. If the positions are losing money, then close them out quickly.

Q5: Is that what you do?

Tony Saliba: Yes, I can close out the positions or make them neutral to eliminate the risk. When your ship starts to leak, you can't drill another hole to drain the water.

Q6: How do you remedy the situation if the trading losses are due to your own decision-making mistakes?

Tony Saliba: Give yourself a day off. If I let myself get anxious and stressed, I choose to lie down and soak up the sun to warm my body and release those things that bother and worry me from my mind.

Q7: What are the factors of a good trade?

Tony Saliba: **Clear thinking, focused ability, and strict discipline. Discipline comes first: choose a theory and stick to it. But at the same time, when you feel that your theory has been proven wrong, you must have an open mind to change your trading strategy. You must be able to say, "My approach was viable in this type of market, but it is no longer applicable in the current market conditions."

Q8: What trading rules do you adhere to?

Tony Saliba: I divide each trade into smaller portions and constantly manage my position in and out to diversify risk. I don't like handling a large order all at once.

Q9: Anything else?

Tony Saliba: Always respect the market. Don't overlook any details and do your homework. Review each trading day and summarize what you did right and what you did wrong. This is part of doing your homework. Another part is to anticipate: What do I expect the market to do tomorrow? How will I respond if it goes against my expectations? What if nothing happens? Consider all possible scenarios. Predict first, then plan, rather than simply reacting.