Tony Saliba-“One-Lot” Triumphs* 1

Tony Saliba came to the floor of the Chicago Board Options Exchange in 1978. After a half-year of clerking, Saliba was ready to try it on his own. He found another trader to back him for $50,000, and after a favorable start, nearly self-destructed. He pulled back from the brink of disaster by altering his trading techniques, and has been successful ever since.

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. His fortune has been built largely by exploiting only a handful of such events. Two of these situations—the Teledyne price explosion and the October 1987 stock market collapse—are discussed in the interview.

The impressive aspect of Saliba’s trading achievements is not the few spectacular gains he has registered in his career. Rather, it is that these gains have been achieved by using a trading approach exemplified by incredible risk control. In fact, at one point, Saliba managed to string together seventy consecutive months of profits exceeding $100,000. Quite a few traders have become multimillionaires by scoring several big hits. A much smaller number have managed to hold on to their gains. Only the rare trader can boast both occasional dramatic gains and con­sistent trading profits.

*Readers unfamiliar with options may wish to first read Appendix 2 in order to understand the trading-related reierences in this chapter.

Although the homework required for Saliba’s successful trading is extensive, he has nonetheless managed to diversify into a wide range of other ventures, including real estate investments, a software company, and a restaurant chain. Overall, his extracurricular business endeavors have proven only modestly profitable, but they have indulged his ap­petite for variety.

During the time these interviews were being conducted, Saliba was involved in the most important business venture of his life: negotiating with a French bank to back him with several hundred million dollars to form a major trading company. His goal is to discover and train a genera­tion of successful traders.

Saliba is a likable person who makes you feel like you’re one of his best friends within five minutes of meeting. He is a person who genuinely likes people—and it shows.

On the evening before our scheduled meeting, Saliba had a minor accident, slipping on the marble floor at the health club in the Chicago Board Options Exchange building. As I showed up at the scheduled time, his aide told me that Tony would not be in that morning due to the acci­dent. I left a message. Saliba called later that day, and to spare me the inconvenience of missing my flight that evening, or making another trip to Chicago, he arranged to meet me several hours later.

We talked at the LaSalle Club bar, which was sufficiently empty to not cause a major distraction. Initially, I was too intensely focused on directing the interview to pay any attention at all to the largemovie screen at the front of the bar. Later on, however, as I relaxed, I glanced at the screen as Saliba was answering one of my questions. I instantly recog­nized the train scene from the movie Risky Business in which the sen­suous Rebecca DeMornay seduces Tom Cruise.

I have a bad habit of severely overscheduling my appointments, and as Saliba was my third interview of the day, I was beginning to feel the strain. My first thought was, “Keep your eyes off the screen, you are having a hard enough time keeping your mind focused as it is.” My second thought was, “It would be incredibly rude not to pay full atten­tion to Tony, especially after he literally hobbled over to spare me the inconvenience of having to reschedule our interview.” My third thought was, “Thank God I’m the one facing the screen.”

What led you to become a trader?

I was a caddy for some grain traders when I was in high school. In col­lege, a friend of mine asked me if I would like to be a broker. I thought that he meant doing the same thing as the guys I had caddied for. So, I said, “Yes. Great! Where?” “Indianapolis,” he answered. I said, “What exchange is in Indianapolis?” “None,” he said, “you do it on the phone.” I had this impression of: “Hello New York, buy; Chicago, sell.” When I got there, I found out I was a salesman.

After a few months, I asked the guys in the office, “Who makes all the money in this business?” They said you have to be on the floor. Right there I decided to go to the Chicago Board Options Exchange. On the floor, I met one of the traders I had caddied for years ago, and he grubstaked me with $50,000.

Isn’t that unusual, giving $50,000 to a kid who used to caddy for you?

It was, except that he was very wealthy and needed to get off the floor because of his high blood pressure. He owned a seat that he had bought for only $10,000, and just needed the ability to trade in a customer ac­count. I was going to help him do that.

What made him think you could make it as a trader?

He had heard some rumors around the floor that I was a hotshot clerk, and he basically took a chance on me.

What happened?

I went from $50,000 to about $75,000 in the first two weeks. I had put on all these volatility spreads [an option position that will gain if the market becomes more volatile] and they were getting pumped up.

Did you think, “Boy, this is easy”?

I thought, “This is it!” I mean, I was a genius. But what I was really doing was taking the opposite side of positions the other brokers were liqui­dating, letting them out of the market with their profits, while I was left holding the bag. This was spring 1979 and implied volatilities were very high because 1978 was a very volatile year. Well, the market went nowhere, and the volatility and option premiums collapsed. Within six weeks I had lost almost everything. The original $50,000 was down to only about $15,000.1 was feeling suicidal. Do you remember the big DC10 crash at O’Hare in May 1979, when all those people died? That was when I hit bottom.

Was that a metaphor for your mood?

Yes. I would have exchanged places with one of those people in that plane on that day. I felt that bad. I thought, “This is it; I’ve mined my life.”

Did you feel guilty because you had lost someone else’s money?

Yes, and I felt like a failure.

Had you started out confident?

Initially, I was very confident because before I started trading on my own, I had clerked for a broker for four months and picked his brain clean.

And now you thought the game was over?

Yes. In June 1979,1 decided that I better find another job. I went to the Levy brothers, who owned a chain of restaurants that my dad built for them. They said, “Any time you want a job, you can run one of our res­taurants.” So, I said, “Hold that line. I am going to give it one more month,”

Did you feel better because you had a cushion?

Yes. I said, “This is great, I’ve still got fifteen grand in my account.”

You had a stop on your life so to speak?

Exactly, exactly. I had a stop on my career. So, I decided to go back and give it one more shot.

Did the fellow who staked you know how much you had lost? Did he ever say anything?

Oh, good question, Jack. He called me every night. I’ ve grubstaked many guys since then, and three or four of them have lost more than fifty grand each. This man was a multimillionaire, and he acted as if this was the end of the world.

Did he ever ask you for the rest of the money back?

No, he just moaned and groaned. He had become wealthy through in­heritance and money he made in another business. He really didn’t know much about option trading. He had bought the seat to have something to do with his life. He told me, “If you lose $5,000 more, we’ll pull the plug.” So, I spent the next few weeks winding down my positions.

During that time, I sought advice from the more experienced brokers on the floor. They said, “You have to be disciplined and you have to do your homework. If you do those two things, you can make money down here. You might not get rich, but you can make $300 a day, and at the end of the year that’s $75,000. You have to look at it that way.” It was like a light bulb went on. 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.

At the time I was in Teledyne options, which was a very volatile market. So, I switched to Boeing, which was a very tight, narrow range type of market. I became a spread scalper trying to make a quarter or an eighth of a point on a trade.

I stuck strictly to my goal of trying to average $300 a day and it was working. This period taught me to be regimented and disciplined.

То this day, I live by the credo of hard work, homework, and discipline. I teach my guys that.

Anyway, at this same time, I still had the remnants of a big spread position in Teledyne that I was in the process of liquidating. It was a position that would lose in a rising market. One day after I had been trad­ing Boeing for about five weeks, Teledyne started moving up sharply. I was not going to let it get me again. I rushed into the Teledyne pit to take my position off. I was hearing floor brokers come in with orders, and all of a sudden I found myself responding to them. I was adapting the same technique I had learned in Boeing to Teledyne, except instead of scalp­ing for an eighth or a quarter, I was scalping for halves and dollars.

What size were you trading at the time?

I was doing one lot at a time. The guys didn’t like me because I was get­ting in their way. They wanted to do ten- or twenty-lot orders.

In other words, you were just a nuisance.

Exactly.

How did you get someone to take one lot?

On the options floor, it’s first come, first served. If you have 100 to sell and someone bids first for just one, you have to do his one before you do 99 with the number two guy. The broker could ignore you if he wants, but if he does, he’s breaking the rules.

Were you ignored?

The brokers never did, but the market makers on the floor did.

By brokers, you mean order fillers?

Yes. The floor brokers are the order fillers, and the market makers are the locals who trade for themselves. On the options exchange, the two are separate.

Were you the only one-lot trader in Teledyne?

For the most part, yes.

Did you take a lot of ribbing?

Oh, did I! They called me “one-lot” for the longest time. The individual who gave me the hardest time was the best trader in the crowd. He had made millions and was virtually a legend in his own time. He started leaning on me and ribbing me right from the beginning. He made my life miserable.

Did your ego get dented by these really successful traders railing you?

Oh, yes. And, it went on for almost a year, day in, day out.

W`re you tempted to pick up your trading a little bit?

I did, but not for that reason. My backer, who had given me such a hard time when I was down, was the prod. Although he didn’t know that much about trading, he did give me one piece of very useful advice. Once I started turning it around, he told me to increase my size. He said, “Tony, a banker makes his first loan and he is very careful, but as he gets more comfortable, he makes his loans bigger. You need to increase your size.”

How did the harassment you were taking on the floor finally end?

When they introduced puts in June 1980, the lead trader, who had given me the hardest time, hated them. He said they were bad for the business and he didn’t want to trade them. I seized that opportunity to really study what puts would mean to us, and I was one of the first market makers to start trading puts.

Actually, it opens up a whole range of new strategies.

Oh, unbelievable. These other guys were set in their ways, even though they had only been there a couple of years. Sooner than you might think, this nmnber one trader befriended me and suggested that we work together. We started working on advanced strategies, getting real crea­tive and abstract.

Were you working these out on a computer?

No, we did everything by hand. Writing out all these “what-ifs.”

Didn’t you still have to be guessing right on price and volatility direc­tion?

You would have to guess right on volatility. However, we didn’t have to peg market direction, because we were setting up spreads that had a big edge. For example, one option might be highly overvalued because it was popular among the member firms.

Eventually, I felt I was doing more of the work, while this top trader in the pit was counting on his ability to muscle the market. He would also stray from the strategies we had worked out and even started doing things to try to hurt me. I would say, “What are you doing?” He would just answer, “I changed my mind.”

Finally, I just said, “Forget it, I’m working on my own.” I started taking on more size. When interest rates went through the roof in 1981 and early 1982, my strategies worked really well and I started making a lot of money. Then in the bull market in 1982,1 had days when I was making $200,000 a day. The guys in my clearinghouse couldn’t believe the sheets; there was just tons of paper.

What kind of trades were you doing?

I was doing everything. I consider myself a matrix trader. I trade every­thing on the screen as it interrelates to everything else. 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 buying butterflies, do you mean you were long the middle or long the wings [that is, the higher and lower strike price options]?

Long the wings. Your risk is limited, and if the market does not move widely, time decay works in your favor. [Barring a favorable price move or an increase in volatility, the value of an option erodes steadily over time. In a relatively flat market, the premium erosion in options with a strike price near the market price—”middle” in butterfly spread—will be greater than that of options further removed from the strike price— “wings” in spread.] Of course, I tried to buy the butterflies as cheap as I could. If I chained enough of them together, my profit zone would be fairly wide. Then I would do an explosion position in a more distant month.

What do you mean by the term “explosion position”?

That’s basically my own term. 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. For example, a position consisting of long out-of-the-money calls and long out-of-the-money puts would be an explosion position.

It sounds like the basic unifying feature of the explosion position is that as the market moves, the delta [the expected price change in the option position given a one-unit change in the price of the underly­ing market] increases in your favor. So, you are really betting on volatility.

Exactly.

In effect, this is the opposite of what you do with the butterfly.

Yes. I put on the butterfly in the front month, where time is working for me, and the explosion position in the mid- or back-month. Then I com­plement that with scalping to help pay for the time decay in the explosion position.

In other words, the explosion position is your money bet in case of a big move, while your scalping is paying the bills, that is, the time decay cost of the explosion position.

Exactly.

Were you always offsetting one position with another? In other words, were you always delta neutrafl [An option position in which total equity will remain roughly unchanged for small price changes in either direction.]

Usually, but once in a while I would take a significant net position.

What was your first really big trade?

Teledyne in 1984. The stock had dropped sharply and I was building up a position in the out-of-the-money October calls. Well, the stock started inching back up, but these guys from the Pacific Coast Exchange, where they also list Teledyne, were leaning on my longs. They just kept batter­ing them on the close every night. Instead of shying away, I stepped up and would buy them. “You want to sell them at га, I’m 1’л bid for fifty.” This went on for over ten trading days.

Why were these Pacific Coast traders leaning on the calls?

The stock had gone down from 160 to 138, and then inched its way back up to 150.1 guess they didn’t think it was going to go up anymore. On May 9 at 9:20 they stopped trading in Teledyne because of news pend­ing. The news comes across the tape: “Teledyne Announces a Stock Repurchase Program at $200 per Share.”

Buying back their own stock?

Yes. The stock was at $155, and I owned the $180 calls. Overnight, I made millions. The stock eventually went up to $300. The next four to five months were great.

What happened after that?

One of my goals in life was to become a millionaire before I was thirty and retire. Well, I was a millionaire before I was twenty-five. I had decided to retire when I was thirty. On May 5, 1985, my thirtieth birthday, I walked off the floor and said good-bye to everybody and that was it. I was never going to come back to the floor.

How far were you up then?

About $8-9 million.

Did you know what you were going to do?

I didn’t really know. I thought I’d stay in the business somehow, but work off the floor.

How long did your retirement last?

About four months.

Were you bored?

Yes. I missed the markets. I missed the excitement.

So, in the beginning, money was the goal, but once you got there it became—

Yes, it became secondary. Maybe if I had a wife and kids, or someone special in my life, I might not have gone back. But trading was my life. It made me feel like something; it gave me a reason for being.

I understand one of your best trading periods was the week of the October 1987 stock crash. Tell me about it.

I was expecting a big move, but I didn’t know if it would be up or down. So, I started building the same type position that I had in Teledyne.

The butterfly spread combined with the explosion position.

Yes.

What was the explosion position in this case?

In this case, it was formed by buying out-of-the-money puts and out-of-the-money calls in the back months. To counterbalance this position, I had butterfly spreads in the front month, which would profit from time decay.

What told you the market was going to have a big move?

You could feel it in the wild gyrations that were occurring by late Sep­tember.

Did you expect the move to be on the downside by that time?

Actually, I thought it was going to be on the upside. At first, I thought we were going to attack the old highs again.

When did you change your mind?

On Wednesday of the week before the crash, the market fell apart. Thursday, it didn’t bounce back, but kind of churned. Now, if it had ral­lied on Friday, then I would have been confused. But instead, the market cracked on Friday. At that point, I was sure we were going down.

Because it was the end of the week?

Yes, and there is a high correlation between the action on a Friday and the follow-through on the next Moniday—at least on the opening.

Did you have any inkling of the siize of the impending move on the following Monday?

Do you know what I really thought was going to happen Monday? I thought the market would open lower, go down sharply, and then bounce back to about unchanged. I actually bought out-of-the-money calls that Friday for protection.

But you said you thought the market was going down?

Yes, but I just wanted to have some insurance. A trader once told me, “Saliba, in stealing second, you never take your hand off first until your other hand is on second.” That’s the way I am; I always have insurance.

Still, you must have been awfully confident that the market was going sharply lower on Monday morning. According to the cover story in Success magazine [April 1988], it sounds like you knew the market would collapse. It says you even deliberately chose to go to the office instead of the floor to avoid being influenced out of your position by all the confusion on the floor. Isn’t that highly unusual for you to go to the office instead of the floor on a trading day?

Yes, if I’m trading, I’m on the floor. But that article is completely mis­leading. They wrote it that way to sell magazines. They make it sound like I planned and plotted to avoid the floor that day. That’s not the story. I was concerned about the positions held by my clearing firm. One guy in particular had a huge position, which he wasn’t closing, and I had to spend a great deal of time on the phone. Now, that’s not as dramatic as the way the magazine wrote it up, but that’s what really happened.

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