- Tony Saliba, a legendary options trader and author of "Managing Expectations," almost blew through $50,000 that was allotted to him before cultivating a successful methodology.
- Saliba refers to his trading approach as a "matrix," essentially employing three different strategies — and militantly controls his risk.
- According to a 1989 interview with Jack Schwager for his classic "Market Wizards" series, Saliba strung together 70 straight months of profits exceeding $100,000.
- Saliba wanted to become a millionaire by age 30. He beat that goal by five years.
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Tony Saliba, a legendary options trader and author of "Managing Expectations," didn't have the idyllic start in financial markets that most dream about. Far from it.
When Saliba found his way onto the Chicago Board Options Exchange in early adulthood, a trader whom he used to caddy for backed his account with $50,000.
"I went from $50,000 to about $75,000 in the first two weeks," Saliba told Jack Schwager in a 1989 interview for his classic "Market Wizards" series. "I thought, 'This is it!' I mean, I was a genius."
Unfortunately, that initial jubilation was short lived. When the market turned against Saliba, it all came crashing down. His bets were far too big.
"Within six weeks I had lost almost everything," he said. "The original $50,000 was down to only about $15,000. I was feeling suicidal."
Saliba felt like a failure.
"He told me, 'If you lose $5,000 more, we'll pull the plug,'" Saliba said of his backer.
That's when Saliba started to seek advice from some of the more senior traders on the floor. In doing so, he cultivated an aha moment.
Instead of taking big bets, Saliba would focus on controlling his risk and making small gains in the most disciplined manner possible.
"I realized that this chipping away approach was what I should be doing, not putting myself at a big risk, trying to collect a ton of dough," he said.
From that point on, Saliba's account was off to the races.
Here's Schwager describing his performance:
"Saliba's trading style can be described as trying to do a little better than treading water day in, day out, while being positioned to take advantage of the rare spectacular trading opportunity. In fact, at one point, Saliba managed to string together seventy consecutive months of profits exceeding $100,000."
Here's how he did it.
After Saliba had his epiphany, he became a "spread scalper" by exploiting even the smallest gaps in price.
The goal of Saliba's methodology was simple: snatch as many small gains as possible while controlling his risk in an uncompromising manner.
At first, his goal was $300 a day — and Saliba started to scoop up one-eighth to one-quarter of a point on his trades.
But when his trading started to catch fire — and he was "scalping for halves and dollars" instead of smaller increments — his backer began to pressure Saliba into trading larger sizes.
That's when Saliba and a trading partner he had rubbed shoulders with on the floor decided to start working on more creative and advanced strategies for taking home large profits.
"I was doing everything," he said. "I consider myself a matrix trader."
He continued: "My basic strategy, however, was buying butterflies [a long or short position at one strike price balanced by an opposite position in higher and lower strike options — for example, long one IBM 135 call, short two IBM 140 calls, and long one IBM 145 call] and offsetting that with an explosion position."
By employing this strategy, Saliba essentially defined a zone where his trade would be profitable while capping his risk.
And here's how he described the offsetting "explosion position."
"An explosion position is an option position that has limited risk and open-ended potential, which will profit from a large price move or an increase in volatility," he said. "For example, a position consisting of long out-of-the money calls and long out-of-the-money puts would be an explosion position."
What's more, Saliba utilized his scalping strategy "to help pay for the time decay in the explosion position."
This left Saliba with the propensity to profit from big moves, while explicitly defining the amount he was willing to lose. Put differently, he leveraged asymmetric bets, capping his downside and leaving his upside potential unlimited.
It was a strategy that paid off immensely.
"One of my goals in life was to become a millionaire before I was thirty and retire," he said. "Well, I was a millionaire before I was twenty-five."
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