Holding a Core Position of Options

03/07/2013 1:00 pm EST


Andrew Keene

President and CEO, AlphaShark Trading

A former options market maker on the CBOE, Andrew Keene talks about why he holds a core position of options so he can trade at will.

My guest today is Andrew Keene, and we're talking to him about option trading.  One of the things he said before we started recording here is that he has 60 positions on at any given time and I wanted to ask about that.  Andrew, that's a lot of positions to kind of monitor.  Why 60 positions on?

Well, the thing is, and I look at it as like a diversified portfolio.  Like if I wanted to have a stock portfolio I don't want to be diversified.  I wouldn't want to have a whole percentage of my book in one stock, so I do a very similar situation when on options.  I was a market maker for 11 years.  I had close to 125 positions, so 60 might sound like a lot.  Most people want to trade five to seven but for 60 for me is actually cutting back a lot, so you know I can manage it.  You know, not every trade is going to be long.  Not every trade is going to be short.  Not every trade is going to be condor or butterfly. 

It's kind of a mixture of everything and I go through my trading strategies when I see the unusual option activity or I see an earnings play I want to do or maybe I'm just bullish on the market and I want to sell some put spreads or I'm bullish Apple and I want to buy calls in it, so everything is different.  You know, they are diversified against each other.  I always look at everything as a confidence level. 

How much of my total book would I want to risk?  It doesn't matter from my point of view if I am trading $10,000 or $10 million.  I don't want to risk 50% of my book.  A certain example; I was a trader on the floor and I was talking about it.  My risk manager said, "Hey.  If Pepsi goes down 50% tomorrow you blow out.  You lose $1 million.  You're done."  I said, "You know what?  Pepsi is not going down 50%."  He goes, "Let me ask you this.  They find a syringe in a can in China.  What happens to the stock?"  I go, "It could go down 50%".  He goes, "If you're comfortable with blowing out basically your whole account on one story like that just like a flash crash thing then that's fine," but I don't want to do that, so you know everything in my book is usually less than 0.5% of my books.

My confident trades are maybe 1% to 3% of my book, but I like to diversify my portfolio so I think I have a better edge than putting four different positions on and if Apple goes down in earnings, which it did, and I was bullish to Apple on earnings, I don't lose a big chunk of my book on it. 

So you're adding and taking away from these positions and kind of working around a core of positions all the time?

Yeah.  I mean, it depends on individual stocks so I trade a lot of individual equities.  You know, in FCX there's some bearish activity so I was short some call spreads.  SCCO, which is a different Southern Copper, which is a different trade, I saw bullish activity so I bought calls in that, so they kind of hedge each other out.  Some are call spreads, some are condors, some are earnings plays, some are weekly, some are September, some are January, so just try to diversify everything.  You know, I am not always long or always short.  I am not always flat but everything kind of mixes together very, very nicely.  They're all different sectors and I use the unusual options that I see going across to base a lot of these trades.

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