Interview With Principal Trader Tony Sizemore

This is the actual interview text for a feature article in Stocks and Commodities magazine published December 2009.

The Interview was performed by John Sarkett, author of of such books as “Extraordinary Comebacks”, “Inspiring Stories of Courage, Triumph and Success”, and the creator of “Option Wizard Software”

The interview took place in April 2009.  There are great Graphic Examples below.
1. How did you become interested in the financial markets, and specifically options? 

When I was about 20 years old I went to work for a Financial Services firm in Atlanta.  Mine was an entry level job copying confirmation statements on micro film.  They had a real trading desk and sometimes I would strike up conversations with the people there.  I knew they were buying and selling stocks and it seemed very exciting, compared to what I was doing.  It was there that I first heard the terms “call” and “put” options.  After about a year at that job, I decided to go into the mortgage lending business as a loan originator.  I went to work for Shearson Lehman in the mortgage department and I learned the basics about how interest rates are priced and how rates are affected by the Treasury market.  It was while working at Shearson that I began trading Treasury bond futures for my own small account.  (I should say that I began “losing” trading bond futures).  After two years there, I started my own mortgage brokering business and during the next 20+ years I traded futures, commodities and off and on, usually making some money for a period of time and then losing it all.  It was during this time period that I became somewhat “self taught” in trading options.

2. You mentioned that you learned from the best.  How did you do that?

In 1994 I had owned a mortgage company for 22 years and I decided to retire from mortgage lending.  Although I had invested in real estate for many years and owned quite a bit of property, this was the first time I had enough liquid capital to pursue trading as a business,  and I reasoned with myself that if I got serious about it, I could be successful as a trader.  I dusted off my OptionVue software and by chance, I found Dan Sheridan on the CBOE website where he had some video recordings on how to trade options like a market maker.  The strategies he was employing were similar to things I had done in the past but his were far superior because his strategies had a plan and he showed how to adjust these strategies based on market conditions.  Suddenly, I really started to understand and began making money using the basic strategies I learned.  At this time I also became proficient with my trading software by OptionVue.  About a year later, I learned from OptionVue that Dan Sheridan was offering personal mentoring so I signed up.  I believe it was November 1995.

3. How long had you actually been trading options at that time?

I traded options off and on for about 10 years up to this point.  I then began to do some serious research in order to seek out and find actual option traders with track records.  I mean traders that don’t just teach for a living.  These guys were hard to find and even harder to convince to teach me their methods.  These guys were either previous floor traders or previous institutional traders that now just trader their own money for themselves.  I can’t name them because that was part of the deal, but I can tell you that one of them you now see on TV all the time

4. Walk me through your first year trading  these mentors methods.  What strategies did you use, what was your contract size and what were your results?  What did you learn?

I traded options using some of the methods for about a year before I began my quest to seek out mentors and during that time I had overall success.  But it was during my first year learning from these super traders that things really began to take off.  The main strategies I used then were the Condor, Calendar, and Double Diagonal.  My initial contract size was a little larger than I would recommend for a new student, but I was comfortable with 10 contracts per spread.  One of the main things I learned my first year with these guys was to treat my options trading as a business and not a hobby.  That really gelled in my mind and helped me immediately.  Also, I learned that every strategy has its own place and time and each strategy should be managed differently.  Knowing which type of strategy and tactic is conducive to certain market conditions is critical.  After my first year with the mentors my own style began to emerge and I learned to develop my own style using the methods as “guidelines” and not rules written in stone.  Although a beginner should follow rules as if they were.  My contract size steadily increased over the years and now it’s not uncommon for me to trade 75 – 100 spreads on each side of a condor in the NDX with 50 to 75 point strikes.  On a busy week I may trade 500 to 1000 contracts on positions that require adjustments.

5. What specific entry rules do you follow for Condors, Calendars, Butterflies etc?  How many days from expiration to you start trades and what Underlyings do you use?

 My main option trading vehicle is the NDX, followed by others such as SPX, Currencies, Treasury Bond options, Gold futures options, Dow futures options, some of the SPDRS and individual stocks.  For condors and diagonals, I like to start the week of expiration of the front month. So about Wednesday or Thursday of expiration week, I will start positions for the next expiration month, this equates to about 25 to 30 days from expiration.  For calendars and butterflies, I like to start around 35 days from expiration of the front month.  I usually will start my trades with about half my intended position size and then work up as the market gyrates, looking to add to the position on some of the larger percentage days.  The current Implied Volatility plays a very important role in my strategy selection.

Its important to note that most strategies have different styles that can be applied to them such as “low probability” and high probability” Condor; “single”, “double” and “campaign” Calendar; “iron” and “broken wing” Butterfly etc. and these variations can be applied based on current implied volatility or market direction.   Most of my strategies these days are what I call “freestyle”.  I may have a base Condor, with an embedded Calendar or two and a Diagonal all at once as one total position.  I then manage my position based solely on the “Greeks” and don’t concern myself with adjusting based on the deltas of my short options or distance between current underlying price and breakeven points.  Following is an example of a “freestyle” position.

6. Presently what are your adjustment points for Condor, Butterflies, Calendars etc?

 For Condor type positions, I will adjust the position when my Delta to Theta ratio approaches 10%.  In other words, let’s say my position Theta is 4,500.  If my delta approaches + or – 360 (8%) then I will look for ways to bring the delta back to a range of + or – 225 (5%).  I like to keep condor deltas at or below 5% of position Theta.  The adjustment I will make to do this will depend upon my outlook for implied volatility, margin considerations and days to expiration of the front month.

I treat Butterflies & Calendars pretty much the same and since I don’t trade a lot of pure butterflies lets talk about Calendars.  Sometimes I do out-of-the money calendars but that is usually part of a larger position so I’ll stick to at-the-money calendars.  First, I will only put on a calendar if the IV is in the lower third of the most recent 3 -6 month range. I will adjust a Calendar if the underlying approaches the expiration breakeven line.  The adjustment will usually be adding another calendar (if the direction is down) or selling a put credit spread if the direction is up.  Once the profit approaches 30% of its maximum profit at expiration, I will either close it entirely or convert it to a Condor type position.  Dan Sheridan believes in “tightening the noose” to protect your profit once your yield approaches 25% and I agree with that.

7. Have these adjustment points changed over time?  Do they change as the market changes?  If so, how?

 That’s a really good question and the answer is yes.  All your position guidelines should remain somewhat fluid.  This is one of the most difficult aspects of not just being profitable long term, but excelling as the years go by.  There is no doubt that we have entered into a new era after the stock market peaked last year and volatility went through the roof.  My adjustment methods have changed to apply to this environment.  For years leading up to last years crash, the markets were different and you had to operate in a low volatility environment.  That meant you could take you time on adjustments, now you have to be more nimble, disengage your emotions as best you can, and be prepared for the market to move further than you think, both up and down.  I have been fortunate to have the association of some very smart traders as well and believe most if not all of them adjust their trading instruments and guidelines periodically as they discover better methods and tweak their rules to provide the best results with the least risk.  This is not easy to do and is one of the reasons profitable options trading is quite difficult.  Some people want to determine a rigid plan based on back testing strategies to determine the optimal rules for that strategy and then proceed to trade based on the rules they developed without any further modification.  Back testing has many benefits but it has been my experience that if the trading plan has too many “if this, then that”, it simply means you have done an excellent job at modeling the past.  To trade the future, you must remain a little flexible.  Also, if you make a mistake (like I do frequently) its best to correct it, absorb the loss and don’t try change your guidelines to accommodate the error.

8. Which Brokers do you use and can you comment on their platform and service?

 My main Broker is Interactive Brokers.  Their platform has some very powerful features, but may appear simple or outdated at first blush.  I feel I receive good fills with their routing system and I like the way the system is laid out.  It’s also customizable and can be used on several screens at once.  I hardly use their analytics and charting though because I find it inadequate for me but I do the lion’s share of my trading through them.  I also use Think or Swim and I have another platform at Fidelity for some charting and money market stuff.  All my trading decisions and strategy design are done using software by OptionVue.  OptionVue 6 software is really my workhorse where I design all my trades and continually analyze all my positions.  In OptionVue, I also segregate each month of the year (fiscal month based on expiration dates) to reconcile each months positions.  This way I can exactly track my performance month to month.  There are also many other excellent features I use in OptionVue.

9.  Some traders add put protection to the conventional condor – if you do as well please tell me specifically how you do this. 

 Yes, I will often use additional long puts as “insurance” on Condors or other type strategies as well.  For put insurance I like to use either a partial calendar or Diagonal (Shotgun Wedding) or I’ll buy a close to the money put (Mouse Ear).  I find these type help you to adjust your Vega to where you want it.  My least favorite type of put insurance is additional longs on your put spread, because they really on help early in the trade and their benefit diminishes quickly over time.  My insurance is not limited though to only puts.  I will sometimes use call insurance as well.

10. Do you have monthly percentage profit/loss results for the last year, two or three?

 Yes, I can provide that to you.  First let me say that there are many ways that people can calculate returns or yield to enhance their performance, such as calculating returns based on only the required margin, or based on the number of days in the trade or market or deducting withdrawals before calculating the return etc.  I do it the most conservation and simple way possible.  I calculate the difference between the beginning balance of the account and the ending balance of the account to determine the profit.  I then take the profit and divide it by the beginning balance of the account for the period to determine my return.  I do this for whatever period I’m looking at be it monthly or annually.  Of course one must deduct any cash additions made to the account during the period add back any withdrawals made during the period to arrive at the correct ending value to use in your calculation.  I like to keep at least 10% of my capital in my accounts in cash at all times, so even though I’m not using all the funds in the account, those funds are part of my business and therefore should be included in the percentage return.  For 2006, my total return was 64.9%. For 2007, my total return was 119%.  For 2008 my total return through the end of August was 67.3%.  Then, I lost 16% in September and lost another 22.2% in October.  I then generated gains of 7.2% in November and 4.7% in December for a total return of 41% for 2008.  For Y.T.D. 2009, through April 15, my return is 20.1%.

11. How much have you diverged from the methods your originally learned, if at all?

 I really have not diverged from the methods per se. What I have done is adopted my own style based on the methods and guidelines and tactics I’ve learned in an attempt to reach my goals, while trying to be true to my own nature.  The main thing I may do different is in the adjustments of positions. Mine tend to be a little more of the “freestyle” variety.

12. Can anyone replicate your success or is there something about your mentality or personality that is unique.

Well, I may be mental alright!  No, I certainly believe that successful option trading skills can be taught to anyone that has the desire, and is willing to put in the time required to learn the craft.  I believe that “what” you are taught and “how” you are taught and that you “continue” to learn, is one of the keys to success.  One of the other keys is to learn to master your own emotions and discipline yourself.  Really both these things are a journey, not an end, with marvelous places to visit along the way.

13.  Is there anything else you would like to add?

Well, I haven’t told you everything about how I make trading decisions or how I do market analysis, mainly because it could be easily misunderstood without a lengthy explanation.  Also, I like to have fun and try not to take myself seriously by joking around on recorded training sessions with Dan Sheridan and other traders.  I like to come up with funny names for positions or situations to help with the stress of trading for a living.  Some expressions I use to describe my positions are:  Flight of the Condor; Butterflies are Free to Fly; Navigating the Sea of Death; The Eagle has Landed; Expiration – A Casual Stroll thru Hell; The One Legged Tap Dancer; Looking over a Four Leaf Clover; Shotgun Wedding; Adjustment Styles / Don’t go Gently into that Good Night; Exploring the Cave of Wonders; Time Traveler. (see graphic examples)

Butterflies are Free to Fly – This is a maneuver when closing a position.  Basically its closing a mildly profitable Condor by converting it to butterfly that has no loss potential.  Then you can hold the “free” butterfly to expiration with the possibility of nailing it right on the short strike.

Shotgun Wedding – This is an adjustment that involves “marrying”, or buying, a back month option at the same strike as a front month short option that is under attack by the market.  This is done as a rather hasty quick fix, and is usually not something you cherish and is temporary, hence the name.

View full size Shot Gun Wedding

View full size Shot Gun Wedding Graph


Time Traveler – This is also called a campaign calendar spread. It is a calendar spread where you sell the front month and buy the expiration month several months out and continually roll your short to the next month as they expire.

View full size Time Traveler

View full size Time Traveler Graph

Navigating the Sea of Death – The Sea of Death is the void in your position that must be traversed before you enter your profit zone.  Some positions that require you navigate the sea of death include a ratio backspread, a long straddle, a short butterfly and a reverse (short) calendar.  There are other positions which could have the sea of death associated with it, but space doesn’t permit explanation of those situations.  Each position requires a certain “navigation”.

View full size SPX – Sea of Death

View full size SPX – Sea of Death Graph


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