Barry Kosoris went from owning a soccer arena to scoring stellar profits in his own options trading business. “My early career had nothing to do with trading,” he says. Early on, he worked for Texas Instruments. Later, he opened a computer store, then moved to Oregon and started a miniature golf center, and after that an indoor soccer center. “When I was doing the family fun center, I got into trading just as a hobby,” he says. But eventually, trading got to be a higher priority for him and in 2006, he sold the indoor soccer center and focused on trading full time.
Initially, he traded stocks. “I found the whole thing fascinating and incrementally worked my way into options trading by looking at trading leaps of stocks because you get a little more leverage there. Then saw that I could generate a little cash by selling some covered calls and realiz[ed] that selling naked puts is exactly the same thing as selling covered calls but it’s a little simpler transaction,” he says.
Naked option writing is the sole focus of his trading business, K4 Capital Management. Originally, his business began as K2 Capital Management. “Unfortunately, a company in Connecticut thought of [the name] before I did.” So K2 eventually became K4, and the success came early.
Because you have to be a CTA to open and trade an account for someone else, Kosoris went through the CTA process when he acquired his first client. “It started out with a couple of people I had been involved with in real estate deals in Oregon. I was able to take on some other accounts and that’s kind of how it went.”
Until, that is, he was profiled in Futures magazine’s October 2005 issue. “[I was] $600,000-$700,000 under management before that article came out, and after it came out, assets under management started doubling every month. It almost got out of control,” he says. The article prompted him to get listed on Barclays. “I had never heard of any of those things because I didn’t come up through the futures industry like most CTAs did. I’m from Eugene, Oregon. [We] put our performance out on these Web sites and people that saw the article and a couple of introducing brokers saw it and started to suggest their clients contact us and place money with us, so that’s when it started to become a real business. I had no plan, no idea any of this was going to happen.” K4 now has $23.5 million under management.
K4 writes (sells) naked options on the S&P 500. “Let’s say you thought S&P wasn’t going to drop below 725 (currently trading at 825) in the next week and a half so you would sell February 725 puts on E-mini S&P. Maybe those options are selling for $50 a piece. You look at probabilities involved and the probability of the S&P dropping that far in that amount of time is less than 1%,” Kosoris says.
He adds that while the chances are low, you have to be aware of what you can do to mitigate risk if it does go below that point. If it happens, you have several options available to buy some time or initial space.
To help manage risk, Kosoris says he’s “ready to ride out market moves all the way to our strike prices or very close to it. We’ll roll out further strikes if we need to.” He sticks with front month options. “Four to five weeks is the maximum we go out, especially now because you have no idea what could happen” in the market, he says.
He bases strikes on volatility. “Volatility is not just something you pick off a chart. You have to make an effort to anticipate volatility,” he says. “If we see low volatility, that’s a caution that we have to expect it to go higher during the trade. You can’t just look at Vix or some of the other common measures of volatility. You have to make an effort to anticipate how bad it could get because that has a major effect in your account equity and your margin requirements.”
He says that one downfall of selling naked options is the greed factor. “You see all that option premium out there. If you’ve gotten a little too greedy and sold too many options, you’re going to lose it all. You’ll lose five years of income in a couple of days if you’re not careful,” he says, adding that if you take a reasonable, diversified approach, you’ll be much safer. “Sometimes the risk/reward profile doesn’t make sense so you’ll take a couple of weeks off.”
Kosoris trades the market indexes and currencies, not commodities, based on a “sticking with what you know” approach. “If you have to feed, water or fertilize it, we don’t mess with it. Those things can be influenced by a rumor about rainfall in Argentina. I have an understanding of the financially related futures and no understanding of agricultural things,” he says.
He says there shouldn’t be a lot of excitement in options trading. “Exciting means bad. Exciting means you’re up all night. It’s not a good thing in options trading. Ninety percent of the time, it’s pretty low stress. I watch the market, if there’s a good trade I can do it, if there’s not, I don’t feel any pressure. I’m not worrying about whether the S&P goes up 3 points or 5 points. That doesn’t matter to me.”
Kosoris measures trading success in consistency. “We end up making 1½-2% a month. The success for us is being able to generate a steady, small monthly income. When you look at the strategy over a number of years, there’s a huge outperformance on the S&P with a steady rate of return, and that’s all we’re looking for. We’re not looking for home runs or making 50% a year. If we can make 18-20% a year and do that on a regular basis, that’s really incredible.”
