TI: What’s the most important advice to give to a trader?

GW: Discipline. Discipline. It’s important to remember, unless you’re one of these big-shot, fund managers that tries to correctly predict the market, you’re not predicting the market, you’re reacting to it. By that I mean if you get into the market and buy 100 call options, which is the right to buy futures, which means you want the market to go up, if the market starts to go down, you have to react. You have to know where you want sell. Get out, cut your losses. That is number one. If you’re going into fund management or you’re going into any kind of technical trading where you’re trying to pick the top or the bottom of a market, more power to you. The trading that I’m being interviewed for, the type of trading that I do is reacting to the market. In that aspect, the number one advice is discipline. When you buy or sell an option, you have to know what you can sell or buy against it, you have to know when to get out, how much profit you want. I can’t emphasize that enough. Discipline, discipline, discipline.

TI: Why do you trade?

GW: Why do I trade? I love to trade. That’s basically why I trade. I was kind of born into it. Actually I shouldn’t say born into it, raised into it. I watched my dad trade, watched allot of his friends trade and started trading right after college. I’ve had ups and downs, definitely downs. But through it all, I’ve enjoyed it. I think that’s important.

TI: What markets do you trade in?

GW: I trade at the Chicago Board Options Exchange, Options on the S&P 500 contract, the SPX. The S & P 500 futures contracts trades at the Chicago Mercantile Exchange and I trade the index options contract at the CBOE. I trade on the floor. I am a member of the exchange. (Contract and Market Information.)

TI: Can you classify the type of trader that you are?

GW: Short term, more on the aggressive side. More of taking a little profit out of a lot of trades as opposed to being a position trader. To be quite honest, I’m not smart enough to be a position trader. I don’t think many people are. What I’m trying to do, the old baseball cliché is to get as many doubles and singles as I can. That makes me very aggressive. In and out, really quick.

TI: What influenced you to trade in this aggressive short style of taking the singles and not going for the homerun type of trade?

GW: Actually, myself. I taught myself when I failed trading the other way (position and homerun approach). When I traded more longer term, I was working for some very successful traders in the ‘80s grain markets. I misled myself into thinking it was easier than it really was, because back then it was the great trending markets of the ‘80s. So I positioned traded, picked positions, set big trades, and kind of fell flat on my face. So I taught myself that I couldn’t trade that way. I don’t trade position style trade anymore.

TI: When and how did you know you would be a trader and trade for a living?

GW: Well, I always hoped I would trade. I worked summers during high school and junior high at the Chicago Board of Trade. I worked for friends of my father’s that were trading with him. I always hoped I would be able to trade for a living. I think I officially decided that I wanted to spend my life trading when my high school economics class took a field trip to the Board of Trade. My father came up to the gallery, led the class around and talked about trading. That’s when I think that I officially decided that this is what I want to do.

TI: How hard is it to actually earn a living trading?

GW: I would say like any other job, hard. Any job that anyone does that they try to be successful in is hard. Trading is probably harder than other jobs just because of the uncertainty. But it also can be more rewarding than others jobs because of the loose structure. You’re not punching a time clock so to speak. Also, most of the trading is bonus oriented or capital gains oriented. It’s not very salary oriented. So in that aspect it’s very hard.

TI: In the last question you addressed the difficulty and the uncertainty. Here’s a question that a lot of people struggle with: how do you live with the constant risks of trading?

GW: How do I live with the constant risk? That is a good question. The short answer is related to the style of trading that I addressed in one of the prior questions. Because of the style of trader I am, I have daily risk, like minute by minute. This type of risk gives you the same feelings that anybody has when they sense trouble. You get tense, you start to sweat, that kind of stuff.

As far as the larger risks associated with overnight and position trading, the answer to that question is, after failing at trying position trading, I don’t do it anymore. So the risks that I have is like this; it’s like somebody going for a big sales presentation. At first he gets all tense, gets all sweaty, but once it starts going you live with it and you realize that you have to do this to make your job successful. And that’s the same type of thing. You deal with the type of trading risk I take in the same way.

I don’t really have long term position risk. I guess this is the best answer because of the style of trader I am. I’m in and out. I don’t really go home with a position and have to watch Bloomberg overnight or stuff like that.

TI: Following up on this answer, does this shorter term risk, the risk you take on a daily basis, even though you’re able to go home without it, does it affect you emotionally?

GW: Yes, it does. It affects me emotionally. However, there’s not that much difference in any job whether it be a school teacher or somebody that just might’ve hit a homerun at a sales presentation. Yes, it does affect me. When it’s going good obviously my mood is better. There’s more of a bounce in my step. But as far as letting it run my life, no it doesn’t. I’m able to leave work at work. That’s not to say that some nights I don’t sleep better than others. That’s not to say that some dinners are not more enjoyable than others. Some weekends are more enjoyable than others because of what might have happened on a Thursday or Friday at work.

TI: Switching gears a bit, what was your best trade?

GW: My best trade. Actually I have to say recently. I am currently involved with a trading group. My best trade was buying a 100 lot of S&P puts as a gamma scalp instead of selling futures. The stock market tanked for the next two days. My partner in this group and I were absolutely thrilled.

TI: And why were you thrilled?

GW: The account went up about 40 grand. On that singe trade.

TI: Okay, this is still a part of the question of what was your best trade. Greg is going to elaborate a little bit on, for the uninitiated, a gamma scalp.

GW: I am involved with a group that position trades in addition to my own personal trading. The group trade options, and gets into position style option trading. As the market moves around while in a position, you adjust or balance risk by getting longer or shorter futures. Not actual futures contracts, but synthetic futures and their economic effects. What happened in this trade, was that we were long calls, and the market went up and up and up, to a level where, we had to get the economic effect of selling futures to protect and flatten the position out. But instead of selling futures, we created a synthetic futures payoff model. To mimic selling futures we had three alternatives. We could sell actual futures, we could sell calls or we could buy puts. All three will make you more delta neutral. So instead of selling futures, we bought a 100 lot of puts. This covered the delta, covered the futures, covered everything. And then when the market proceeded to tank and then bottom out, not only did we benefit from being short the deltas, the 100 long puts themselves gained in value. So we probably made about 8 to 10 grand more than we would have normally had we just sold futures.

TI: Okay, two quick questions. Will you explain briefly gamma and delta?

GW: Delta is quite simply the probability that an option is going to expire in the money. In the framework of trading delta neutral, you use futures to hedge your overall option position. When you buy calls and when you buy puts, you’ve got to sell or buy a number of S & P 500 future contracts to hedge the position to make it delta neutral. Here is an example: if you buy a 100 lot of calls with a 40 delta, you’ve got to sell S & P 500 contracts to make the position delta neutral. Because of the notional amount of the SPX put, in this case the number of contracts would be either 10 big S&P contracts or 50 mini S&P contracts.

TI: Okay, then a brief definition of gamma?

GW: Gamma, by definition, is the rate in which the delta changes as the futures move. So, in laymen’s terms, if you’re long gamma, you want the market to move, because you’re getting longer as the market rallies, you’re getting shorter if the market breaks. You pay for that long gamma by the decay in the option.

TI: Greg ,as we proceed here, the last question was about your best trade and then we talked a little bit about gamma scalps and delta neutral trading. What was your worst trade?

GW: That’s an easy one, too. Unfortunately I remember it well. I used to, at the end of every expiration week, think it was real easy to just sell puts and sell calls away from the at the money strike. And 9 times out of 10 they would decay. You sell these calls, they go to zero, you collect. You sell these puts and as you get closer to expiration they decay even faster. So I had this little scheme that I thought was real easy. On Tuesday, Wednesday, Thursday, Friday of expiration, I’ll just keep selling calls and keep selling puts and they’ll go to zero and I’ll make 60 to 70 grand on each expiration. Well, what happened was after a couple of months of doing this and feeling really great about my trading, I proceeded to do it on a day that an unexpected report came out for the financial industry. This was when I was trading fixed income options as opposed to the equity options now. Bonds went limit down for the first time in about six years. Actually limit down for the first time since the Gulf War. So the puts that I sold became a huge liability. It was a nightmare. I proceeded to lose three months of profits in I would say conservatively 12 minutes.

TI: Alright Greg, bottom line advice to a beginning trader.

GW: The advice I have for the beginning trader is stuff I had to learn. It took me longer to learn than most people, hopefully you’ll learn it faster than I did. Know when to exit a losing trade. Nowadays, the costs are low enough that you can get in and out of trades. You don’t have to get married to a trade. So that’s the number one thing. You buy a couple of S & P’s and they start going down, you sell them, you get out and you turn it over. And the second most important thing is not to go for the homerun. I learned it the hard way. A lot of people learn it the hard way, not just me. There’s a lot of people that have done it and there’s a lot of people that still will do it. You don’t have to hit the homerun. If you can make 10 trades and take a dime or 25 cents, meaning a thousand or twenty five hundred on them and do this consistently everyday, you don’t need the homerun.

TI: Okay Greg, here’s the question. Something you never do in trading.

GW: Something I never do or something you never should do?

TI: However you want to take it, the question is something you should never do in trading?

GW: Cannonball. You laugh, but that’s the term.

TI: I don’t know what cannon balling means?

GW: The term goes with the whole discipline idea. If you’re long, let’s just say you buy 5 contracts, 5 S & P’s, 5 bonds, 5 beans, whatever it may be. The price goes lower and lower and lower and you don’t have the discipline to get out, but instead you buy more. It’s called cannon balling.

TI: Alright Greg, thanks for some very good advice on the last question. Here’s the next question, something you should always do or consider while trading?

GW: Have a plan to get out. Have a set plan of what you want to do. In my case, since what we’re doing is option arbitrage, which is buying and selling different levels of index options, you buy something based on where you could sell something out. So that’s the advice I have the most; is to know, have a plan. Know what you want. What you want to get out of a trade, if you want to make a quarter, or you want make a half dollar, or you’re going to sell something else against it. And that’s the best thing. And also be quick and be loud. While floor trading be loud. Obviously trading at a screen in an office you can’t really be loud there, but be quick there and have a plan.

TI: Greg, how many people do you personally know are successful at trading? Give me a ballpark idea.

GW: There’s a lot because I’ve been doing it a long time, I have a lot of friends that do it, including the one I’m talking to. A ballpark figure. I’m not going to count acquaintances, because really everybody at work is an acquaintance. And there’s some successful and some not successful, but as far as like true friends that I socialize with, outside of the industry, I would say around 20 that are very, this is their career. They’re either retired or living quite nice as a result of trading and trading only.

TI: Okay, following up to that question, how many people do you know that have busted out?

GW: Way more people bust out than make it. It just so happens that whether by luck or whether, I don’t know what it is, but it’s just a coincidence that the majority of extreme stories, when I say extreme, like either really hitting it big or really busting out, I happen to know more people that have done well. And as far as busting out, I don’t know if you ever truly bust out to where you can’t try it again. I think more people are like myself, where if they fall on their face, they get up and they try again. I’ll tell you one thing, kind of an addition to your question that you didn’t ask, I know nobody, not one trader who ever came in to the exchange and made it without failing. Like never nearly went broke, never lost it, never struggled.

TI: So is part of making it, losing it?

GW: Exactly. There are so many examples. One of the best traders in the history of the Exchange, and this story is well known, had to stop trading to drive a cab. I don’t know anybody, with all the people I have known and worked with, which is hundreds and hundreds of traders, I don’t know anybody that’s ever made it and they just made it. They’ve never not failed. It goes with the territory.

TI: Two questions together here. Is trading hard, and if so why do you think it’s so hard?

GW: Well, like I said a little bit earlier in the interview, trading is hard. But you know what? Being an accountant is hard, being a lawyer is hard, being a teacher is hard. Trading, just like any other job that you want to do well in, that you want to live off of, raise your family off of etc., is hard. The reason I say trading can be a little bit harder than other things is because of uncertainty. Trading is more of a capital gains and bonus perspective. It’s not really punch the clock for a salary, start at 40 grand then you make 50 then 60, 70, 80 then upwards. Trading is more like this: you either trade for yourself and it’s all capital gains, or you work for a trading company and the salary usually just pays your monthly bills and then you bonus out. And that aspect is what’s hard about trading. The uncertainty. You can’t financially plan that well because you really don’t know. If you get a draw or monthly salary, that will pay the bills so you’ll have a roof over your head, things like that. But the money is either made or lost, success or failure so to speak is on the bonus or capital gains you get.

TI: Greg, we talked a little about the hardest parts of trading. Two questions rolled into one, what is the best part of trading and are you happy being a trader?

GW: The best part of trading is, and some people view this as shallow, is the outright potential to make money.

TI: Are you happy being a trader? Bottom line.

GW: Yes. Again, like I said before I think anything that you do that you want to do, well, you have to like it I happen to enjoy trading. I happen to enjoy that no two days are the same. I happen to enjoy that there’s no set salary. I enjoy the uncertainty. I actually enjoy it. I actually enjoy going to work not knowing what’s going to happen. I don’t know if thrill is the right word but, certainly it’s exciting.

TI: Can you elaborate a little bit on that last idea. Can you call that the action?

GW: For lack of a better word it’s the action. In most jobs you know what projects you’ve got to do, whether you’re an accountant or a teacher, you’ve got projects. You’ve got rules, you’ve got things you have to accomplish. In trading, while you have things you have to accomplish, the bottom line is you don’t really have a morning meeting of things that you have to do that day. Basically you do what the market allows you to do. Some days you make one trade, two trades, and other days you make 200 trades. You don’t go into that day saying I’m going to make this trade or I’m going to make that trade. You react to what the market does. That’s what I like about it. You have no idea what the market is going to do until it does it.

LEARNING AND RESOURCES.

TI: How do you learn how to trade?

GW: Clerking and working for a trader. That’s really the only way.

TI: Any good books out there? Any recommendations on books?

GW: Actually we’ll give a little plug to the Sheldon Natenberg book, Option Volatility and Pricing. This book on options is like the “bible of options”. That’s where option traders learn. You have all those other books, you know, the Market Wizard’s, stuff like that on successful traders, just like anything else. Successful golfers write golf books, successful traders write trading books. But the short answer to that question is you learn to trade by clerking and then trading. That’s really it. Work for a good trader or a good company that will give you hands on training on how to trade. That’s the only way to do it.

TI: What resources do you use when you’re trading?

GW: Newswire stuff. On the actual trading day I use the newswire information. Information that comes out on Bloomberg, information that comes out on the news, CNBC, that type of financial stuff. That’s the information I use as far as indirectly knowing what’s going on. The information that I really use directly is the information in front of me on the floor. This is the floor trader’s perspective, not so much the upstairs guy that but this pertains to the floor trading type of work that I do. The information I use is what I see in front of me. I can see before CNBC, before any of these other networks, I can see what Goldman Sachs is buying. I can see what Morgan Stanley is buying. I can see what Goldman Sachs is selling. I can see what Morgan Stanley is selling because it’s in the pit. The information that I use is what I see in the pit.

TI: What magazines do you read?

GW: Relating to trading, actually I read this magazine, Trader’s Illustrated. It’s great. Definitely read it. I read the Wall Street Journal everyday and Newsweek and Barrons every week. I like Barrons.

I also do a lot of internet reading on many different sites. One site is Bloomberg.com. The reading I do which pertains directly to my trading and work is more of not so much long articles, but bullet point type reading. The headlines, CNBC; stuff that helps you know quickly what’s going on. Especially around Fed time. The Federal Reserve meeting time that meets every quarter. That’s the reading I do on the internet. I like to know what’s going on. I can’t emphasize this enough. The type of trading that I try to do, we try to do, is day and couple of hours type trading (short term). As I have mentioned before, I’m not going to predict what the Fed is going to do and sit on a position or try to claim to be omniscient and predict where the market’s going to go and position myself that way. Again, I emphasize I don’t try to do that. I trade more reaction. A reaction of what the market does, is doing, as opposed to these Harvard MBA types. React to the market, try to take advantage of what it gives me.

If I was smart enough to predict where the market was going, I wouldn’t be busting my rear-end seven hours a day on the floor next to a bunch of guys coughing or sneezing on me. I’d be on some yacht in the Caribbean with Jimmy Buffet, calling up and just putting in buy & sell orders. That’s just not how it works. It works for some people but it doesn’t work for me.

TECHNOLOGY AND TRADING

TI: How tech savvy are you?

GW: Not very. Fortunately for me my partner, who runs all the risks and position management for our little group, is very tech savvy. He writes modelling programs. Models to value options. So I must be totally candid and say that he does all of the tech. stuff. Whether it be position management or putting in the inputs for the value of the puts and calls. I’m good at operating the system. I take the values that are derived from the models that he develops, and very quickly give my bids and my offers to the various brokers around the pit. But as far as to answer that question, tech savvy, I am not. That is not what I would consider one of the strengths of my individual trading.

Okay, you might have answered this, but bear with me, how much does knowing about using technology actually help your trading?

It’s unbelievable. Knowing about it. For me it's underrated because I happen to have somebody that’s unbelievable at it.

TI: What about using technology, applying technology to option trading?

GW: Using it? It’s incredible. The values. We’re in the pit and I’m standing in the pit with a handheld computer on a strap. I kind of look like a beer vendor. The computer I use calculates the value, theoretical values that were developed by my partner of what the options should be worth. Even the existing price of the underlying S & P 500 contracts is programmed. So knowing that that value is real, knowing that that value is derived with some very good information behind it, I’m able to quickly give bids and offer prices to brokers that quote. Now remember that’s all we’re there for. We’re there to take the other side of what the commercial paper wants to do. What I’m willing to pay for an option at, what I’m willing to sell it at. Knowing that the values that are fed into the computer that I use are accurate, that’s 70% of the game.

TI: If someone wants to talk to you, do you want to talk to them? Are you willing to talk to them, and if so where can they reach you?

GW: You can absolutely talk to me. The best way to reach me is through ABG Trading, Inc. at 312.789.8415. The best way to reach me is to go through ABG. I will be more than happy to answer questions.

TI: Last thing, I’d just like to thank you for all the time that you spent with me and Trader’s Illustrated; we appreciate everything. Thanks Greg.

Symbol:
SPX

Underlying:
The Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. These are summed for all 500 stocks and divided by a predetermined base value. The base value for the S&P 500 Index is adjusted to reflect changes in capitalization resulting from mergers, acquisitions, stock rights, substitutions, etc.

Multiplier:
$100.

Premium Quote:
Stated in decimals. One point equals $100. Minimum tick for options trading below 3.00 is 0.05 ($5.00) and for all other series, 0.10 ($10.00).

Strike Prices:
In-,at- and out-of-the-money strike prices are initially listed. New series are generally added when the underlying trades through the highest or lowest strike price available.

Strike Price Intervals:
Five points. 25-point intervals for far months.

Expiration Months:
Three near-term months followed by three additional months from the March quarterly cycle (March, June, September and December).

Expiration Date:
Saturday following the third Friday of the expiration month.

Exercise Style:
European - SPX options generally may be exercised only on the last business day before expiration.

Last Trading Day:
Trading in SPX options will ordinarily cease on the business day (usually a Thursday) preceding the day on which the exercise-settlement value is calculated.

Settlement of Option Exercise:
The exercise-settlement value, SET, is calculated using the opening (first) reported sales price in the primary market of each component stock on the last business day (usually a Friday) before the expiration date. If a stock in the index does not open on the day on which the exercise & settlement value is determined, the last reported sales price in the primary market will be used in calculating the exercise-settlement value. The exercise-settlement amount is equal to the difference between the exercise- settlement value, SET, and the exercise price of the option, multiplied by $100. Exercise will result in delivery of cash on the business day following expiration.

Position and Exercise Limits:
No position and exercise limits are in effect. Each member (other than a market-maker) or member organization that maintains an end of day position in excess of 100,000 contracts in SPX (10 SPX LEAPS equals 1 SPX full value contract) for its proprietary account or for the account of a customer, shall report certain information to the Department of Market Regulation. The member must report information as to whether such position is hedged and, if so, a description of the hedge employed. A report must be filed when an account initially meets the aforementioned applicable threshold. Thereafter, a report must be filed for each incremental increase of 25,000 contracts. Reductions in an options position do not need to be reported. However, any significant change to the hedge must be reported.

Margin:
Purchases of puts or calls with 9 months or less until expiration must be paid for in full. Writers of uncovered puts or calls must deposit / maintain 100% of the option proceeds* plus 15% of the aggregate contract value (current index level x $100) minus the amount by which the option is out-of-the-money, if any, subject to a minimum for calls of option proceeds* plus 10% of the aggregate contract value and a minimum for puts of option proceeds* plus 10% of the aggregate exercise price amount. (*For calculating maintenance margin, use option current market value instead of option proceeds.) Additional margin may be required pursuant to Exchange Rule 12.10.

Cusip Number:
648815

Trading Hours:
8:30 a.m. - 3:15 p.m. Central Time (Chicago time).

Position and Exercise limits are subject to change.