The “Voice of Options” and Former Market Maker at CBOE Drops Some Serious Options Knowledge
As a former Market Maker and through the Options Insider Media group, Mark Longo has partnered with some of the most well know names in the financial world. This translates to some serious knowledge/understanding of the trading/investing world.
Mark Longo is the founder and CEO of the Options Insider Media Group, the leading online destination providing free options information, education, and analysis for options users. As a former options market maker at CBOE, Mr. Longo has a unique understanding of the nuances of listed derivatives, and translates that knowledge into the podcasts, newsletters, and educational content offered by the Options Insider. Known as “the voice of options,” Mr. Longo is a frequent contributor to financial media outlets, and has been featured in Institutional Investor, Crain’s Chicago Business, Marketwatch, and the New York Post. Through the Options Insider Media Group, Mr. Longo has partnered with some of the most widely-recognized names in the financial world, including the CME Group, CBOE, NASDAQ, the Options Industry Council, and more, to bring timely, educational, and entertaining podcasts to investors of all levels of ability.Below is a re-cap of a live Q&A we had with the entire StockTwits community. For the full transcript please GO HERE.
What’s the most valuable lesson you learned as a market maker that you would tell retail traders trading options? — michaelbozzello
Retail traders tend to focus on delta — aka direction. But MM’s learn quickly that all options traders are primarily trading volatility. Understanding that lesson and learning how to mitigate volatility risk, spreading off positions, trading volatility skew, etc — those were undoubtedly the most impactful lessons that have remained with me to this day.
What was your worst trade ever and what did you learn from it? — CaptainFalcon
There were many wild days on the floor of the CBOE. But let’s stay more current. We trade and maintain multiple different accounts with different brokers at the Options Insider. This is done for the benefit of our audience on the pros & cons of each platform. But it also can lead to errors. One that comes to mind happened when an account of ours got short naked calls during the Google acquisition of Motorola. It was assumed that there was stock or calls to cover the short position in a different account but that was not the case. So we ended up taking a sizable hit when the stock gapped up about ten handles after the announcement. This was yet another strong reminder to never get caught short “units”-aka caught with naked short exposure to an underlying if that had been a spread instead the losses would have been mitigated.
Do you use futures in your strategies? For hedging perhaps? If so, which? $ES_F? $VX_F? Other? — patrickrooney
Started my career on CBOE in $SPX pit so spent a great deal of time hedging SPX with big S&P futures and minis outside of SPX pit I haven’t spent a great deal of time w/futures — mostly focusing on equity and etf options.With that said, we have a new program on our network w/ @CMEGroup called This Week In Futures Options — here’s a link. Hosting that program has brought me back to the “dark side” of futures and futures options I’ve mostly been trading in #WTI and #Gold as a result of that program since #VolatilitySkews in those products are the most interesting to me. #WTI was favorable for bullish risk reversals (short OTM put, Long OTM call) a few months back & gold is usually favorable to collars — aka long underlying, long OTM put, short OTM call. Short answer — I tried to get out, but they keep pulling me back in.
I know you’ve had many guests. Which either surprised you the most or you learned something very new? — michaelbozzello
That’s a great question! We’ve been doing this for over a decade and have had hundreds, potentially thousands, of guests. They all bring something unique to the table. I think one of the more interesting/surprising was Thomas Peterffy — IB CEO. He’s a legend in the options market making and technology arenas. We had him on a few years ago and I was surprised at how much passion he still had for the options markets — even after so many decades and so much success. It was a good reminder that, if you have a passion for what you do, you can continue doing it and be successful for many years.
What is the best way to make money in options efficiently? — MarkLitwin
Easiest way to lose money is probably to just buy ATM straddles w/no hedge and watch your money decay to nothing. Best way to make money is obviously a longer answer and depends on your trading style (long vs. short premium delta vs. vega), experience, etc. However, in general terms, develop a firm understanding of options fundamentals and also a firm understanding of how options perform in particular products. Then you can spot the discrepancies. that pro traders use to make money. For example, if everyone is bidding up the call skew in XYZ before earnings by buying OTM calls — you can take advantage of that discrepancy to buy cheap ATM/OTM call verticals ratios, etc. rather than just follow the lemmings and buying OTM calls. That’s the key to long term success — be patient develop a strong knowledge base and strike when the conditions are most favorable. Good luck to you.
What can happen to the current options being held of KITE which is acquired by GILD and is being delisted ?— ascentaa
Corporate actions are always fun. Depends on the type of action, is it an outright acquisition for cash, stock, etc. In this case looks like a cash deal for $180/share of $KITE. So $KITE options will be cash settled at a price of $180. So every ITM call option is now worth ($180 — Strike Price) X equity option multiplier of 100. So if you’re long one 150 strike call you’ll receive ($180-$150) x 100 = $3000 cash. Obviously the OTM options expire worthless. Either way you lose your time value on those options so try to avoid holding positions through corporate actions. For more info reach out to our friends over at @OptionsClearing. They have the specifics for each corporate action.
Is it true that MM’s give each other signals trough pre-specified order size? What is the biggest size one could buy in options? If one had a long position of $1B and want to hedge with $10 million worth is that ok? — yieldhawk
Short answer: No — unless the order is being shopped on IM or the usual channels, in which case they will probably get a heads-up from the broker as to how much size they need to get done. Longer answer: There are so many myths and misconceptions out there about the market-moving power of the “evil cabal” of options market makers. But the truth is far more banal. Most MMs & liquidity providers left business because it’s not profitable any longer certainly not for the amount of risk involved. There are a handful of big firms left — Citadel, Susquehanna, etc that do have a fair amount of input in the market. But at the end of the day it’s order flow that trumps all else. Just look at VIX last week — huge institutional product and yet one enormous whale printed 2M contracts in one day and fundamentally changed the volatility skew of the product as a result. The market makers didn’t have any. The market makers didn’t have any impact on that trade except to get the heck out of the way. Our mileage may vary. Position limits vary by product, strategy, broker, account size, etc. But your example is quite viable provided the firm has enough capital in its account to fund the transaction. Again — Just look at VIX last week one customer traded approximately 2 million contracts in one order. So if you have the cash then you can usually make it happen.
What’s your favorite sell signal? — bxvets
Never been much of a technical analysis guy. Any interest I had in it got beaten out of me down on the cboe. When it failed as a tool for gamma scalping — but that’s probably a tale for another day. In terms of options-centric sell signals, you can’t get much better than implied/realized volatility cones. They are very basic tools that work just like Bollinger bands for volatility. They map out multiple standard deviation moves in both directions so you can on a historical basis, if you are trading cheap or expensive volatility. That can then be used to inform your trading to buy cheap volatility and sell expensive volatility. Good luck to you.
Do you trade positions through dark pools? — S_Warz
Nope. Options have an exchange execution requirement that makes them fairly unique in the financial markets. Orders can be shopped and facilitated off the floor, but you have to actually print the trades on a lit exchange venue. That’s why you don’t see options dark pools out there. Vibrant OTC market but no dark pools in the traditional sense.
Stafford was one of the few people I looked up to while on the CBOE. What was the best lesson you learned from him? — christopherbrecher
Unfortunately I arrived at Stafford Trading around its height in the late 90’s / early 2000’s. There were hundreds of options traders & groups all trading different products: indices, fixed income, equities, etc. So there wasn’t much time for personal interaction. We started our own group in the $SPX and focused on that. So our primary interactions came with technical & account management staff to make sure our ops ran smoothly. Of course, I did hear a few interesting, and probably apocryphal, stories about the 1987 crash. But those are probably best left for another day.
Do you prefer iron condor vs. iron butterfly? (I know 1 strategy wont work every time, but what scenario is preferred) — folfox
Love this question! We can do hours on this but I’ll try to keep it (somewhat) brief. A good friend once said that an Iron Condor is an Iron Butterfly for cowards. That’s a funny phrase that also happens to have a grain of truth. Iron Butterflies involve trading long/short ATM straddles then hedging that position with a long/short OTM strangle. Because it’s an ATM straddle it’s an inherently riskier, but also potentially more rewarding, strat. than an Iron Condor which is a long/short OTM strangle hedged by an even further OTM strangle. If you’re familiar with options then you can probably see the difference right away. The ATM straddle is going to capture much more movement in the underlying than an OTM strangle. It’s also going to decay much faster. So there’s high risk/reward on the long side. Same holds true for the short side = short ATM straddle will decay rapidly but will also lose money with every tick of the underlying away from the ATM strike. So you’re playing with fire either way. That can be too much for some people who choose the somewhat calmer Iron Condor. By switching to an OTM strangle you are giving yourself a little more cushion in the trade should it go against you. You are also potentially limiting your profit, so it’s a tradeoff. There is no right or wrong way to trade — it comes down to your comfort level and risk profile. If you’re the kind of person who watches markets 24/7, and participates in a @stocktwits Q&A, then you might want to try an Iron Butterfly. If you prefer to sleep at night and only check your positions a few times a day then the Iron Condor is probably for you. Great question! Let me know how you choose to proceed
Which is a better timeframe for maxing a 1–3 day “swing” trade with options: Weekly expire vs out 1 month vs out 2–3 months. — TMD4817
Weeklys are going to give you the most bang for your buck in that scenario. The reason is because Weeklys have a much higher gamma than 1 month or 3 month option. You want a high gamma if you’re looking to profit from a swing trade. If you go out a month or beyond your gamma might not be high enough to capture the full move in the underlying. One acveat — High Gamma and High Theta go hand-in-hand. So if you’re buying Weekly options just be aware that they will decay extremely rapidly. So if your expected move takes longer than a few days there might not be much value left in your weekys by the time it happens. So you might want to look into vertical spreads to offset the decay or if you’re comfortable with them then you can try your hand at calendars. But those are usually for seasoned traders.
I noticed at noon Wednesday decay hits especially on Weekly’s; are there other key timeframes to be aware of? — TeKMuNNee
See some of my comments above about swing trades. However, in your specific case weeklys are fascinating. We can probably do a full hour just on the nuances of weeklys and decay. When they first listed we saw a massive crush of selling right after the bell. They would decay the products very aggressively to the point where it created some buying opportunities around Friday afternoon because they had already decayed the products to Monday’s levels. So it was effectively a free weekend. This is just one of many quirks. Now that they’ve introduced Monday and Wednesday Weeklys we’re seeing weird decay patterns emerge with those products as well I’m guessing your Wednesday decay phenomenon may be linked to the emergence of those products. At the end of the day I’m not sure if the impact of so much volume flooding out of monthlys and into Weeklys is fully understood yet There’s still a lot of research to be done on this topic. Good question.
Do you foresee any innovations in market making such that it might become less centralized or more crowdsourced? — AdmiralTweezers
Unfortunately no — at least not anytime soon. The realities of the market right now are that the capital requirements, regulatory requirements and risk requirements of market making limit it to a handful of firms. It would be difficult for individuals or “the crowd” to replicate that on any sort of scale. If anything, we’ve seen an exodus from market making with more firms deciding the risks/costs are simply not worth the rewards. One stat to keep in mind on this topic: <20 names account for approx. 50% of total industry volume. So individual orders can probably be matched in those large names like Apple and SPY. But in the other names it requires a large firm to backstop the orders and make markets. I don’t see that changing anytime soon.
Could you explain Theta and how it helps/hurts options traders? Should anyone ever buy OTM options? Could you tell us the process of how options market makers mitigate risk/remain delta neutral? For option credit spreads, is there a “sweet spot” of DTE in order to capture max premium and sufficient theta decay? — Lonesome
Good question. The old adage is that options die a little bit every day and that’s true. Theta is, quite simply the amount that your options decay each day as they approach expiration. Remember that option prices consist of extrinsic and intrinsic value. The extrinsic value is what decays — so if you’re primarily trading OTM options then you’re trading options that can (and most likely will) decay to zero. That brings up second question — why buy them? The answer is that it typically doesn’t pay to buy OTM options outright. Their probability of expiring ITM is <50%. Not exactly good odds over the long run. If you must buy them then do so as part of a spread to reduce your overall outlay and improve your chances of profiting on the trade. FYI — that doesn’t mean you should just blast out OTM options all day long. Naked selling OTM options works until it doesn’t — then you could lose a lot. You’re better off selling those as parts of spreads as well to mitigate your risk. Good trading! Delta neutral is simple in theory — more difficult in practice. It obviously involves hedging your delta exposure with an equivalent amount of the underlying or other options positions. But delta is not static. Your delta changes according to your gamma so now you have to develop a skill known as Gamma Scalping to maintain your neutral position. This is one of the more difficult aspects of market making to master — part black art and part science. Everyone has a unique way of doing it — some used technicals (which always fell short for me), others simple order book analysis, fundamentals, etc. Some scalped aggressively others let their deltas run a bit. However, in 2017, delta neutral has fallen by the wayside. There isn’t enough two-sided order flow for most market makers to remain neutral any longer. Which is why most existing firms have morphed into prop trading shops. They have to take positions because it’s the the only way to survive and remain profitable. Obviously that comes with more risk -hence so many firms leaving. There’s a lot of interesting, and somewhat conflicting data on this. Our friends over at @OptionsClearing did a great collar study a few years ago that found the “sweet spot” for long premium was approx. six months. That was the ideal point between overspending on premium and also having your position suffer too much from decay. On the short premium side for credit spreads — Shorter durations are typically better. So you’d assume Week 1. But the emergence of multiple Weekly expirations has caused some interesting ripples in this logic. There are quite a few people who like to focus on selling credit spreads in weeks 2 or 3 vs Week 1. The thought is that they can still get most of the decay without exposing themselves to the gamma explosion that is Week 1. Spreads between the weeks are also interesting if you’re comfortable with calendars. Week 4 vs. Week 2 then repeat with Week 3, etc. Good luck.
Still new myself and wondering what are some of the pitfalls to options trading I should watch out for? Any tips? — coverthecall
How long do we have? Seriously — there are many stumbling blocks. Master your Greeks, beware of what I said before RE: retail and delta vs. volatility. Beware of being naked short units — It’s tempting to just blast out a bunch of puts and watch them decay. That works until it doesn’t — so get used to trading spreads. Also, don’t be greedy when selling options. If a short position erodes below $.10 or $.05 just close it out. You can lose dollars waiting for those last few cents. Also — avoid overtrading and remember the KISS acronym. That applies well to new options traders. There’s a temptation to get very complicated but simple strategies like vertical spreads, covered calls, etc — can be very effective.You may want to check out our Options Boot Camp show to learn more.
Why buy options if you have sufficient fund? — xth
There are so many reasons. Let’s focus on a few. 1. Leverage — Options give you far more bang for your buck from a margin and leverage capacity than the underlying. Stock is 50% margin but you can use options to get underlying exposure at much more favorable rates. 2. Capital Efficiency: By keeping more money in your trading account you provide yourself with more trading opportunities. The Greeks — Options give you exposure to volatility, time decay, etc that most underlyings, particularly stock, simply do not provide. That said, you should be cautious when buying options and should usually purchase them as part of a spread to reduce your outlay. It is still possible to lose money when buying options but it’s usually more of a death by a thousand cuts rather than one big loss.
What do you do about thinly traded options, if it’s a long time horizon and out of the money but the stock is rising? — NickGweezy
- Thin options are an issue — most obviously when it comes to the bid/ask spread. The spreads in those products will be wide so your entry/exit costs will be high. You can try to work your orders but MM’s have little incentive to provide price improvement in a thin name. In general — not a fan of buying long-term OTM premium by itself. I’d rather see you use one of my favorite long-term options use cases — stock replacement. Buy a long term ITM option — somewhere around 60–75 delta — that’s cheaper than buying the stock plus you have the added benefits of The Greeks! If the stock drops your delta will decrease and volatility will increase slowing your losses. If you are savvy you can upgrade your position to a synthetic covered call (one friend calls this a fig leaf, each their own) This involves selling 1-month, or potentially weekly, OTM calls against your long ITM call. If done correctly, the covered call premium could more than make up for the cost of the long-term call. You’d have to weigh the benefit of that against the rate of appreciation of the stock to determine the best way to proceed, but either is preferable to simply loading up on long-term OTM calls. Good luck. Let me know what you choose.
Stocktwits as a whole loves to buy into “max pain” price theory…what’s your thoughts? — AdamShoe
Not a huge believer. Max pain ties in with the theory that options are somehow huge drivers of price movement around expiration. That view is dramatically overblown in the broad media. There is some movement toward strikes around expiration but it’s not the inescapable vacuum of a black hole that some would have you believe.
You guys gave my hands a workout today. Thanks for all the great questions. If you want to learn more about what we do then visit us at www.TheOptionsInsider.com. We produce a wide variety of content including our popular Options Insider Radio Network
Judging by your questions, many of you might like our Options Boot Camp and Option Block radio programs. You can find them on our website or simply by searching in Itunes or other podcast providers. You can also grab our mobile app for all platforms. One last note — We’re streaming The Option Block live today (every Mon & Thurs) at 3pm central via mixlr.com/options-insider/. Join us for the live stream and you can continue to ask more questions of myself and our other co-hosts. Good luck to all of you
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