(Guest interviewer John Sarkett, a published author in the options space, contributed this Q&A.)
Film noir fans might see a passing resemblance of our subject to the wrestler Gregorius in the 1950 film noir Night and The City (1950, starring Richard Widmark). Perhaps fitting, because he was a high school and college wrestler and the self-assurance of a grappler comes through in his manner and speech. He is also a skydiver (retired), private pilot (who once was forced to conquer white-out conditions and then, another time, an emergency when part of a wing fell off in flight), and avid motorcyclist. In a few words, Scott may be described as competitive, unphased by risk that can be managed and resourceful at doing just that. Also, still, after all these years, a market enthusiast. “Options are the greatest game in the world,” he says. “More fun than anything you can do with your clothes on…or off.” Scott has written extensively for market periodicals under the nom de plume J. L. Lord, but agreed to take some time out of his (literally) round-the-clock schedule to switch sides and provide this interview.
What or who specifically attracted you to markets?
I was in pre-med at Loyola University, but only because I didn’t know what I wanted to do when I grew up. I got a summer job as a clerk at the Chicago Board of Trade (CBOT). The excitement and the atmosphere were unlike anything I had ever seen. I was hooked and never looked back, and you could not pay me enough to go back to school.
What made you think you could succeed in it?
I suppose it tapped into my competitive instinct. I had been a wrestler, and faced many daunting opponents, but you do your best, and sometimes you win. The speed, excitement, and emotional intensity of 300 alpha males competing in a gladiator pit was too visceral to walk away from. This was at a time when options were still in their infancy and the 1987 crash was just around the corner. The S&P 500 futures had just started trading a few years earlier, and it had an 1850s gold rush feel.
What education, books, tapes, seminars, and mentors did you employ to get started?
Back in the 1980s, there wasn’t as much material readily available as today. There were no options education gurus or firms. Most people were just learning how to price an option and the inefficiencies were commonplace. Serendipity played a huge role in my career as the first company I worked for was a think tank that was light years ahead of the competition. Some of the pit traders back then had price sheets that showed option pricing on a grid as the market moved up or down, most of us did the math in our heads.
Which mentors helped you along the way?
Ah, mentors (laughs). The pits weren’t really a particularly warm and fuzzy place. Rookies, by and large, had to fend for themselves. There was an element of sink or swim. I had a great start with the first job. Knowing that I wanted to spend the rest of my life playing in that sandbox I was always the first one in the office and the last one out. I had two very generous mentors who were really big deals in the financial world, John W. and David K. who gave me all the chances anyone could ask for. Most of the learning was me looking at option chains all night long with a pencil – trying to crack some secret code.
Please walk me down your career path.
In 1985 I was on the Chicago Board of Trade as a clerk (CBOT), and then the firm moved me to the Chicago Mercantile Exchange (CME) as they were having trouble keeping people on that floor as it was a lot rougher of an environment. After the crash in 1987 the options trading dried up on the CME and I moved to the Chicago Board Options exchange (CBOE). I became a floor member and was on various committees, spending most of my time in the SPX pit, but occasionally the OEX (S&P 100). Eventually as the millennium was approaching things started to evolve from needing to be on the floor to have an edge, to being able to trade from home with the same opportunity, so I retired from the floor.
How has your trading changed over the years?
Not as much as one might think. The emphasis has always been on managing the trade, i.e., reducing risk. The use of a variety of tools: straight options, credit and debit spreads, butterflies, risk reversals, and more. The traders who made the most were the most resourceful at reducing risk and maximizing profit. When I was young, I spent all week trading and all weekend researching how to be a better trader, breaking down my trades, analyzing how I could do better. I can say, however, teaching made me a better trader.
What is interesting is the level of sophistication the world had reached with trading. Some of my students are more advanced than professional floor traders in the 1990s, and many of my students have gone on to manage large chunks of money for big firms.
Please give an example.
One of the strategies we employ is the unbalanced condor. We typically enter on the close of a trading day, it gives the trader a jump on the next day’s theta (options decay). Let’s say we’re in a bull market, so we would look at the call side. You buy an above-the-money call debit spread, go out another 35 more points and SELL two call credit spreads. You cut your cash outlay in half for small additional risk. We like to do these for about $0.00 to $0.30. If the market opens higher, there is a profit. If lower, you can still likely recoup your debit and wiggle out of the trade at break-even.
How do you know when to do which strategy?
Well, that is a subject unto itself, a big one, which strategy for which market. I will be having a two- to three-day class on just this subject in July. It will be the most intense course I have created in years because volatility, time until expiration, time decay, etc. all affect strategies differently.
What is the common thread among all these trades? What is the mentality that connects them?
It always comes down to risk reduction. Now that I have the trade on, how can I reduce risk? How can I take money off the table and still create a profit zone? What can I sell against my position and still leave room for a good profit?
How do you manage your trading around major reports: FOMC, CPI, etc.?
These reports have a lot of explosive power and can change market direction. I am respectful of that power, and typically don’t take a position in front of them. Remember, my game is all about defense, I am more the middle linebacker than the wide receiver or quarterback. But since markets tend to regress, after the fury is spent, up or down, I might look at taking a quantified-risk contrary position.
How often do you do webinars?
Weekly. We live trade almost every market day via Slack.
So your students can emulate your trades?
Yes, certainly. The options education market has changed since the days of “this is a butterfly,” and “this is an iron condor.” Clients expect live trading.
How much time do you devote to personal trading?
I am wholly devoted to the success of our students, so not much. But I eat my own cooking, I will post the same trade in my own account after everyone is filled but these are not large trades for me. I also have other accounts where I play around a little, but given how StratagemTrade keeps growing I feel a huge obligation to put my students first as that is what I would expect if roles were reversed.
What advice do you have for beginning traders?
Start small, stay small until you consider yourself a maestro. There is NO shame in paper trading or doing only one contract. Never compare your trading size to someone else. Learn as much as you can.
Your personal goal is to move to Maui, what attracts you?
It is paradise, we have had some in-person seminars there, and I love it. The first time I landed in Maui and the plane door opened the smell of the island’s flowers and air wafted through the cabin I felt the most calm I had in years. The residents are all very nice people with no pretenses, even though many are very wealthy.
Will you continue to trade and/or teach, or will it be pure retirement?
I love options, and I am a person who can’t be idle. I am constantly teaching, or writing our newsletters, writing a book or researching the markets. I answer student emails in the evening until late. I go to the gym at 2 a.m. I get a few hours sleep and then I do it all over again. I am teaching my one son the business, my other son is a banker, trades and just had his first professional MMA fight.
What book are you currently writing?
Collars. It will cover everything on trading collars one could imagine, including adding shares with the money brought in from puts in a collapse.
Thanks for your time Scott.
John A. Sarkett has sat in on a number of the subject’s teaching sessions, and conducted this interview by email and phone. He wrote both Option Wizards®: Real Life Success Stories from the Financial Markets and Market Mentors (Amazon).
