In the forward of Anthony Saliba’s newest book “Managing Expectations: Driving Profitable Option Trading Outcomes through Knowledge, Discipline, and Risk Management,” Market Wizards author Jack Schwager highlights an anecdote from the book where Saliba demonstrates how a covered call, or buy-write — what is thought to be a conservative strategy — is the equivalent of a short put or naked put, which is seen as extremely risky. In fact, Saliba’s example shows that a buy-write could entail greater risk than the naked put.
Schwager’s point is to highlight that “Managing Expectations” is “a book written by a trader who learned option theory through trading.”
Just looking at the subjects covered in a preview of the 24 chapters of the book, which will be released this September (managingexpectationsbook.com), gives you an idea of the obsessive detail, with which Saliba approaches his work and the world of options. Perhaps that focus and attention to detail was born from early failures — as if often the case with talented traders — which forged in Saliba a desire to learn all he could about options.
Saliba began his trading career at the Chicago Board Options Exchange in 1979, working as an independent market maker who would later serve as a member of the CBOE Board of Directors from 1987 to 1989. Despite taking a conservative approach, he did so well that he was able to retire briefly before his 30th birthday before being lured back to the floor to make markets in new option products. He is one of the original “Market Wizards,” as profiled by Schwager in that best-selling book, the only option trader featured.
He went on to head options technology firm LiquidPoint and act as managing director of ConvergEx. Currently he is running a venture capital business, Saliba Venture Management, LLC and a family office.
A theme that has run throughout his career is a desire to teach options and options strategies. In fact, Saliba has written numerous books on options throughout his career, which begs the question, what new can you write about?
“We hear from many that theoretical training has been commoditized, that it is practical experience and the tenets of being able to see options in another way that is desired,” Saliba notes. “This book is light on definitions yet heavy on the practical evaluation of options strategy, the option Greeks and volatility; helping the reader understand and embrace the consistency of change.”
He says that the primary audience for the book is the Chinese market and new professional traders, but it is also an attempt to provide a deeper dive than those commoditized products that cherry pick strategies without providing the deep knowledge needed to mold the appropriate option strategy based on all available data.
This is not for the shopper who wants to learn the hot strategy to make you rich. In fact, the title — “Managing Expectations” — is a purposeful bit of advice for the neophyte trader. Saliba acknowledges that the expectation of quick riches is one of biggest obstacles to new traders.
“Many new users of options can’t wait. It’s not the nature of their place in the food chain. Those that are patient from the start are in the minority,” he notes. “It is usually after losing more than they imagined would happen that the expectation management becomes a part of their repertoire. With a whole new breed of traders yearning to learn about the great instrument listed options can be, we decided to take them down a measured path.”
That measured path includes an in-depth look at the Greeks, put-call parity and understanding how to build synthetic positions. He notes that having a broad understanding of all the elements that go into options valuations is not only important, “it is the only way to really view opportunities.”
“It is a lost art that leaning on systems to too great a degree masks,” Saliba says. “Then when there is extreme volatility, strategies within a complex position can be overlooked.”
This goes back to our initial anecdote. Too many traders have only a superficial knowledge of certain strategies, marketed to them as an off-the-shelf solution without a deep understanding of all the components. “This has been the case forever and we feel is just the nature of an overly simplistic user-base combined with margin calculations that may falsely favor the covered call, Saliba says. “The exchanges have for decades been putting out proper educational points, but I’m not sure regulators are even sound on this point. Buying stock is part of the investing culture, selling a call against it makes it a bit less risky. But selling the naked put, with the same risk profile, gets short shrift as being too risky.”
But markets get complicated quickly and every serious trader needs to know all the tools available to them.
“Being able to see how flexible option structures are by knowing synthetics inside and out leads to alternative strategies that accomplish the same goal (hedge, exit, risk-identified entry, etc.). Particularly for new professional traders that may be forced to make a market for a customer or the larger retail trader whose position has gotten too large.”
Chris Hausman, portfolio and chief technical strategist at Swan Global Investments, provides the following blurb for Tony’s book: “The value in knowing synthetic relationships is profound. It can help any trader or asset manager see through the weeds and make better decisions with clarity. Knowledge of synthetic relationships is a dying art of the new-world trader. Tony always emphasized the power of studying option synthetics as a way to separate yourself from the crowd.”
“Managing Expectations: Driving Profitable Option Trading Outcomes through Knowledge, Discipline, and Risk Management,” does not appear to be a light summer read but may provide the depth to put emerging options traders on solid footing.
Many traders have compared trading options vs. outright futures or equities to playing chess instead of checkers. Well, Saliba is an options master and if you have a desire to learn chess rather than checkers, you may want to pick up his new book.