Mark Wolfinger began his options career in 1977, when he became a market maker at the Chicago Board Options Exchange (CBOE).  For the past 6 years, he has been educating individual investors, stressing the conservative use of options to enhance returns and reduce market risk. His latest book, Create Your Own Hedge Fund: Increase Profits and Reduce Risk with ETFs & Options (John Wiley & Sons), 2005 outlines those conservative methods.  His earlier book, The Short Book on Options: A Conservative Strategy for the Buy and Hold Investor concentrates on the most basic options concepts for people who are first learning about options. 

Part I : Who is  Mark D. Wolfinger ?

TJ : Please provide a background of yourself ? What were you doing before you become a trader

MW : My degrees are in Chemistry (BS from Brooklyn College; PhD from Northwestern University), and before I became an options trader, I had been a senior research chemist for Monsanto Company (worked there 7 years).   When I was given the opportunity to trade the laboratory for the trading floor of the CBOE, I couldn’t resist.  There are many people with scientific backgrounds (mostly mathematics) who traded at the CBOE, but few had chemistry backgrounds.

TJ : When and how did you get into Options trading ?

MW  :In 1976 a friend, Sanford Naiditch, purchased a CBOE membership.  He didn’t move his family to Chicago immediately, but instead returned to his home (Akron, Ohio) on the weekends.  He was eager to discuss his life as an options trader, and I found it fascinating.  Together we decided (I needed very little encouragement) that becoming a market maker at the Chicago Board Options Exchange would be a worthwhile endeavor.  Sanford even went so far as to find someone who owned a membership but was not interested in becoming a market maker himself.  It was arranged that I would come to Chicago, meet the seat owner and talk about the possibility of my becoming his nominee on the trading floor.   We hit it off and I returned to Akron, gave notice to Monsanto, packed my car and drove to Chicago.  That was in December 1976 and I now had to learn how to become a market maker.
 
TJ : What prompted you to be author and educator ?

MW : As a market maker, I saw many customer orders and I noted that few were sophisticated and that most bought and sold options in a manner that gave them little opportunity to profit.  Years later, when I left the trading floor, I decided that I could put my trading experience to use and transmit part of what I had learned options novice.  My education business is targeted to the person who is first starting with options and to those with a little experience.  I want people to understand what options are and how they work.  I encourage them to begin trading knowing that options are risk-reducing investment tools, and should not be used for gambling. 

TJ : what are you first : trader or educator ?

MW : Educator.  I earn more income, and spend more time, trading, but am more interested in teaching others how to use options conservatively. 

TJ : How do you find time to trade ?

MW : I am not a full time day trader.  I open spread positions as opportunities present themselves, and spend time monitoring my positions, making sure my risk is under control.  I never day trade, so I can always take time away from the markets.  I write when the markets are quiet, or when the markets are closed.

TJ : What is a typical day like ?

MW : Check the pre-market opening news.  Check e-mail.  Reply to readers and seminar clients who have questions.  Once the market opens, I check to see if any adjustments are needed and then I take my morning walk.  I spend most of the day in front of the computer – watching positions, contributing to an options discussion board online, or writing.
 
TJ : What make you want to become a trader ?

MW : It wasn’t that I wanted to become a trader so much as I liked the idea of being able to leave the corporate world, work for myself, have the opportunity to make lots of money and take plenty of vacations.  The idea of being a market maker on the exchange floor was very exciting to me.  Well, it didn’t work out the way I imagined.  In the more than 20 years I spent as a market maker, I went on only one decent vacation.  I made plenty of money, but the truth is that I was careless with my risk control and encountered several serious setbacks.   But I had loads of fun, learned a great deal, made some money, and came away feeling that I made the right choice when I gave up chemistry for trading.

TJ : What was it like when you first started ?

MW : The trading floors are very different that it they are today.  They were much smaller, there was only one options exchange, and traders entered their trades on ‘trading cards’ and reported each trade to the exchange by turning in tear sheets from those trading cards.  Only calls were traded - puts didn’t begin trading until a few years later.  Today, there are few market makers.  Big trading companies own the majority of the exchange seats, most of the trading is electronic and the volume is huge and keeps growing.

TJ : Did you receive any assistance when you started trading ? Where did you go for advice ?

MW : Yes.  The clearing houses (the equivalent of broker for the market makers) provided seminars, but they were pretty unsophisticated compared with educational material available today.  We were made aware of the Black-Scholes model and how to determine a fair price for an option.  Then we were on our own.  I received a good deal of intelligent advice, but ignored the part about carefully avoiding too much risk.

TJ : How have you evolved as a trader ?

MW : It’s a far different world for me now.  First, I’m a retail customer, not a market maker.  But, the big difference is that I am now very aware of risk.  All my risk is finite and limited.  I am more interested in earning a living than in making a fortune, and that conservatism has paid off.

TJ : How long did it take before you consider yourself successful ? And how would you define success ?

MW : I never really considered that question.  For many years, I was playing the game of market making and did not consider the real-world aspects of the money I was earning (think: Monopoly money).  I was very successful in some aspects of being at trader, but less successful in others.   I define success as being happy with my career (and I loved trading on the floor of the exchange) and earning enough (I did) to exceed my needs.  In this business success often means making, and keeping, a fortune.  Well, by that measure, I did not succeed.  I made the big bucks as a market maker, but did not keep them.

TJ : What is the largest contributor to your success ?

MW : Today, that’s an easy question to answer.  Discipline.  Risk management.  Money management.  I wish I had developed those skills earlier.

TJ : What’s your first trade like ?

MW : As an options investor, it was nothing special.  I wrote covered calls on some stock I wanted to buy.  Cannot recall which stock, as it was in 1973.  As market maker my first trade was a ‘gimmie’.  On my first day on the floor, my friend and mentor, Sanford Naiditch asked me to make a market in one of the options in GWF, Great Western Financial.  I did, and he bought one contract at my offer and sold me one at my bid – a net profit of $12.50!  That was my welcome to the CBOE floor.  Others were not as friendly to the newcomer!

TJ : What’s your worst trade and what lessons did you draw from that ?

MW : Not a single trade, but a position. In October 1987 I was short a gaggle of put options.  The painful lesson is that one should not trade with unlimited risk. Today, when I sell one option, I buy another to limit any possible losses to an acceptable amount. 

TJ : What methodology do you use ?

MW : I trade modified covered call positions – and their equivalent.  I sell put spreads (the equivalent of a collar) and some call spreads.  I don’t own any individual stocks unless I write covered calls (with a protective put) on them.  My idea is to make consistent profits and allow those profits to compound over time. 

Part II : The Short Book on Options: A Conservative Strategy for the Buy and Hold Investor

TJ : Your first book Options: A Conservative Strategy for the Buy and Hold Investor and 2nd book Create Your Own Hedge Fund : Increase profits and Reduce Risk with ETFs and Options, is the contents any difference between the three books ?

MW : The Short Book on Options is a primer.  It’s a concise introduction to options for those who have always wanted to get involved with options but have never actually done so.   The emphasis is on being certain the reader comes away with a clear understanding of how options work.  It does not overwhelm with a myriad of strategies, but concentrates on a single methodology.  The 2nd book encompasses that material but goes further.  It includes some background information on Modern Portfolio Theory and how to apply its basic message to options trading.  I then show the reader, in detail, with many examples, two basic strategies for using options conservatively – to enhance profits.  The book uses exchange traded funds (for diversification purposes) as the main investment tool, but the lessons apply equally well to using individual stocks.

TJ :  What motivated you to write your 2nd book ?

MW : I wanted to expand the information provided in the first volume and with John Wiley & Sons as publisher, I could reach I wider audience. The book is not intended for advanced option traders, but is aimed at those who are in the early stages of their options trading careers.
 
TJ : Where did you get the inspiration and ideas for the book ?

MW : From within.  Although I did some research for the 2nd volume, the book contains ideas that I had been thinking about for years. It satisfied my need to help individual investors get started with options.  Options have been misunderstood for too long, and many people – people who should know better - consider options to be ‘dangerous’ for investors.  I wanted to try to set the record straight.  Options were originated (many centuries ago) as risk-reducing tools – and I believe most investors and traders would profit by using options that way, and not as gambling tools.

TJ : Have you incorporated any ideas from the books into your trading and analysis ? Which aspects have you incorporated ? How have it improved your trading and analysis ?

MW : I use the general themes constantly – covered call writing and equivalent strategies.

Part III : On Markets

TJ : How do you view the market ?

MW : That’s easy. I view the market as unknowable.  I have given up trying to predict market direction. I enter trades (premium selling) with the idea of being able to profit if the market does not move too far, too quickly.  I also view the market as very friendly.  It allows me to make a living, but it has a violent nature that shows itself on occasion.  That means I always buy protection for those times when the market unexpectedly goes crazy.

TJ : What has changed in the markets now from when you first started ?

MW : Computerized trading makes a big difference.  There are automated buy and sell programs and sophisticated programs that force inefficient markets back into line.  That means fewer opportunities for profit.

TJ : What remained the same in the markets now compared to when you first started ?

MW : Greed is still present (Gordon Gecko would appreciate that).  It’s still subject to all the emotions of crowds, as evidenced by the bubble of recent years.Part IV : On Trading   

TJ : You’ve been trading for some time. I think one of the most difficult things traders are faced with is dealing with emotion. How do you avoid falling into the type of trap? 

MW : I keep my emotions under control when deciding how to handle my positions.  The biggest emotion for me is FEAR.   When afraid of getting hurt, I tend to adjust now, take a reasonable loss (if necessary) and move on.  I used to close my eyes to danger and hope for the best.  That is not a successful trading style. 

TJ : Do you think it is important for an options trader to be aware of every type of strategy there is or should they pick a few diverse ones and know them extremely well ? 

MW : The fewer the better

TJ : In your experience as a trader, are there any techniques a trader can apply to increase his or her confidence to become a better trader? 

MW : Nothing instills confidence like winning.  Thus, to me, the answer is to initiate positions carefully and do all you can to keep them from becoming big losers.  Some losses are inevitable, but the amount lost must be reasonable when compared with the reward potential.

TJ : What else should people keep in mind when they are managing risk ?

MW : It is a significant part of any trading methodology.

TJ : In your opinion, what is the biggest pitfall in trading options ?

MW : Beginners jump right in and make trades before they are prepared.  Education comes first; more learning comes 2nd and trading comes next.

TJ : How much capital did you start with ? How much capital is required to start trading for living ?

MW : I began trading as a market maker and required a substantial amount.  Retail traders require much less.  Trading for a living requires that the trader have a proven method.  But how much capital is required - there is no set answer.  First, traders must have enough capital to cover potential drawdowns.  Second, must have enough to cover margin requirements of trading positions, with room to spare.  Because margin requirements vary with the method used, no one can tell another how much is required.  But, margin calls must be avoided at all costs.

TJ : We always hear that about 90 to 95% of traders fail. Why do you think that might be? What would be some of the reason behind that and to overcome it? 

MW : Trading is NOT for everyone.  People who have no business making the attempt do get into the trading business and they fail.  People have no idea what’s involved – in fact I have no idea what’s involved in trying to be a scalper or day trader.  I’d never considered trying to do that.  What I do is open option spreads that I believe have a high probability of success and a risk/reward ratio that allows me to earn profits, even after taking those occasional losses.  Not every trade is a winner.  I don’t make money every month.  But I do come out with enough income over time. 

TJ : How do you measure success in trading?

MW : Enough income to make it an acceptable substitute for a real-world job and more importantly, being satisfied at the end of the day that this is work I enjoy doing.

TJ : Given a chance, what do you like to do differently in trading again?  

MW : At the start of my career, I would like to have had a much better risk and money management skills.

TJ : Let’s talk about trading education. How long do you think it would take someone to master the art of trading?

MW : Wow.  What a question.  I could say “a lifetime” because mastering anything takes constant practice and there is always more to learn.  But it really depends on what one wants to learn and how involved one wants to be as a trader.   I teach my beginners some solid investing guidelines and strategies that work in the real world.  That’s enough for some people to go on and make good money on a consistent basis.  Are they ‘traders’?  Probably not, but they are successful investors.  Investors do trade, and if they do well, haven’t they mastered part of the art?    For most people who consider themselves traders, that would not be nearly enough.   They have much to learn and it takes plenty of time to develop skills and to learn from experience.  I don’t believe anyone needs to be a MOT (master of trading).  Instead they need to master some niche. 

Part V : Trading Systems and seminars

TJ : What is your view on trading systems ? Do they work?

MW : My view is entirely negative.  But, that’s a bias, as I have no solid experience, nor do I want any, with a trading system.
 
TJ : What are the pros and cons of trading system? 

MW :Bottom Line: To me, if a system worked, the developer would NEVER sell it. Thus, I believe they are all too expensive and not worth the price. 

TJ : You conduct seminars too. What do you teach at the seminars? 

MW : Seminars are designed for beginners. I make certain the attendees understand what an option is and how an option works.  I give them examples of how they already use options in their everyday lives and that contrary to much negative publicity, options are nothing to fear and are easy to understand.  I talk about why anyone would want to buy pr sell an option.  The risks and rewards.  I teach them how to use options is one or two very basic, risk-reducing strategies.  I want my clients to comprehend what they are doing and to get started trading options with enough knowledge to make trades that provide a high probability of success. 

Part VI : Recommendations

TJ : What books would you recommend to our readers?

MW : Anyone who is not a beginner would probably want to have a copy of McMillan’s Options as a Strategic Investment. 

TJ : What advice would you give to someone who is thinking about trading for a living?

MW : I would try to avoid being asked that question.  But, if pressed, I would suggest the person have enough cash to support himself for at least 6 months so that making money was not essential (at first). I would want the potential trader to have the unequivocal support of his/her spouse or partner to pursue the dream. 

TJ : Any last thoughts to our readers? 

MW : There are many option strategies available.  Find one or two that suit your abilities, temperament and comfort level.  Don’t get greedy and accept what the markets give you.