Chat with Traders is brought to you by Trade the Pool. Did you know that every decade the market reinvents itself? Online brokers opened the doors, mobile apps made trading seamless, and commission free trading erased barriers. Now a new era has begun. Meet, trade the pool, limited risk trading. And now you also have unlimited time to reach the profit target. From now on, your trading risk is capped. and your trading opportunities are limitless.
Trade the pool funds home-based stock traders with up to$200,000 in buying power. That means you can trade larger positions and scale your strategies without risking your own savings. It's time to trade with more capital, making it truly worth your time and effort. Ready to trade the pool? Click the link in the description and join the stock trading revolution today.
Are you ready to get serious about trading? Then join Tasty Trade, Investopedia's best platform for options trading in twenty twenty six. Options, futures, and more. Tasty Trade has everything you trade all in one platform. Get low commissions, including zero commissions on stocks. So you can keep more of what you earn. Trade smarter with advanced charting tools, a pre-built strategy selector, risk analysis tools, and more features. Visit Tastytrade.com slash.
chat for more information. Tasty Trade Inc. is a registered broker dealer and member of Finra, NFA and SIPC. The biggest secret of the best traders in the world is that they're just like everyone else. However, they've worked hard to learn the markets and discover what works and what doesn't. How can you hear about these? Here's your host. Alright guys, welcome back. Hope you've been having an awesome week.
You know, if you think back, like, it's almost unfathomable to think that there was a time and it would take a couple minutes to execute an order. Nowadays we have traders taking extreme measures just to get filled a nanosecond quicker than the next participant. But for this week's guest, Tim Bigham, that was the reality when he first entered the world of trading during nineteen eighty five, and that entrance was straight onto the floor of the CBOE.
Just a couple years into his journey, Tim experienced the full force of the infamous nineteen eighty seven crash. While he survived and was still in good shape to trade the following day, this gave him a true appreciation for the importance of correct position sizing after seeing so many traders get wiped out. Tim really goes into the topic of position sizing and why it is absolutely vital to get it right during the later part of this interview, so make sure you stay tuned in.
Additionally, Tim does a great job of explaining some of the terminology associated with options. How he uses scanning technology to generate trade ideas and a whole lot more. I also want to point out that Tim will be keeping a close eye on the comments. So be sure to leave a question you'd like them to answer. Just go to chatwithtraders.com forward slash Tim, scroll down to the bottom of the page and you'll see the comments section.
Drop a question in there and uh Tim will be sure to get back to you with an answer. Alright guys, enjoy the interview and I will catch you soon. Tim, what's going on man? How are you? I am doing fabulous, Aaron. Thank you. We finally got some warm weather here in Chicago, so Enjoying sixty degrees and won't last long tomorrow, maybe snow again, so
Kinda like the market where uh, you know, one day it certainly looks good, the next day not so good. So uh the ups and downs are kinda the uh things that keep life interesting in a way as well. Absolutely. I think last time we was spoken it was actually snowing where you are as well.
you know, much of a market this year pretty flat across the US uh, you know, equities year to date. So certainly struggling to, you know, make any kind of headway. And I think You know, given where uh valuations are at and the fact that the free money, you know, uh parade may be coming to a
Not a complete end, but certainly has been ongoing uh for a long time now. It may be a struggle going forward here in my opinion, uh to kinda grind higher. Might be kinda range bound for the next uh, you know, several months certainly.
Okay. Okay. Well that could be that could be a little bit boring for the people who are a little bit more long term. Yeah, so and there's yeah, it's strategies and we might delve in that a little bit, you know, using options where you can actually make money if nothing happens. which is a nice use of options that I focus on. But uh you know, yeah in a sideways market if you're just, you know, flat out long stocks, uh, you know, a lot of times uh, you know
uh nothing happening, uh you tend to lose interest. But there's ways to take advantage of that as well. And uh hopefully we can get some people interested in some option strategies that are useful and uh, you know, fairly easy to implement as well. Okay, good one. You'll um we'll definitely get into that a little bit later. So Tim, you're a true market veteran. You're incredibly passionate about trading, um, especially options.
And um, you know, I'm just really thrilled to be speaking with you today. So thanks very much for coming on. No problem at all, and uh a true veteran means I'm an old guy, I guess is a nice way of saying that, but I certainly have the scars to prove it and
You know, I am, as you mentioned, you know, absolutely passionate about options. That's why I'm still, you know, in the game. It's what gets me up in the morning and, you know, keeps me going throughout the day and, you know, having the battle scars and being able to share'em with people who are newer to trading I think is
you know, not only uh something that I enjoy doing, but I think it's almost uh something, you know, you should do as a trader is to pass on, you know, what you've learned to the next generation of traders who are just starting off. I know You know, when I started off uh in the mid nineteen eighties, uh, you know, a bunch of guys who I learned from passed on their knowledge to me and a lot of that was just, you know
Stuff you you couldn't even put a price tag on the you know, how useful it was. It was, you know, real you know, useful uh you know, kind of through the war information. And, you know, you can read books, you can read everything else, but until you've actually been in the trenches and gotten beat up a little.
Um, you know, uh you really don't get the true flavor. So talking to the veterans who've been there around and having them pass it along I think is invaluable. And I I look to do that, uh, you know, with anyone new to trading or especially new to option trading. And I love doing shows like this to, you know, kinda get that, if you will, new generation of traders.
people interested in trading, excited about it and pass along what I know to maybe, you know, help guide them. So they might miss a few of the landmines. You're gonna get blown up a little bit, believe me. As as long as you keep all your limbs and everything. You know, you know, uh getting blown up not too bad is the key to trading, uh, as uh we find out. If you can take away your two or three worst trades. You know, if you look back, usually those are the ones that wreck people.
It's not being wrong, it's being wrong in a big way. Yeah, absolutely. And I mean, we really appreciate taking in your insights. So, you know, it's great to have you on. But let's let's kick this off by um Taking us back to sort of I think it was around nineteen eighty five where you sort of first got started in trading. So tell us how you got into it and then we'll sort of go from there.
Yeah, absolutely. Actually I was finishing up getting my uh undergraduate college degree at DePaul University in Chicago and a friend of my dad's was a trader on the Chicago Board of Options Exchange. So I basically, uh, in between classes would go over and kinda hang out with him, help him out, uh, basically, you know, be his errand boy, if you will, take out orders, do whatever needed.
And, you know, within uh probably a half hour of being on the trading floor, I instantly knew this was a place I wanted to be. It was just a, you know, world uh that I'd never seen before and the excitement level and what was going on there I just found, you know, intriguing and, you know, from really day one I I kinda was hooked on it. I I really love the environment of trading and the culture of trading and being a trader too. Um you know, it embodies a lot even off the trading floor. So
I uh actually uh started then I got a job as a runner on the trading floor. They don't have those anymore, but that would l literally you'd you know, call up on the phone, they'd tear off a piece of paper, you'd walk it out. You couldn't run, but you're called a runner, walk it out. to wherever that particular
um you know, option was trading at. I was on the options floor, so if it was say IBM, you would walk it out to the IBM trading pit, hand it to the broker there, wait and then bring it back. And that's how they reported the fills.
Hard to believe in this day of electronics where, you know, a half a second is an eternity. You know, back then it was, you know, uh two, three, four minutes many times before the client knew if he got it or not. So Um and then as a runner, uh kind of worked my way up the ladder and then uh got my own seat in June of nineteen eighty seven, which was, you know, uh just a few months before the crash of uh nineteen eighty seven. And uh the one thing I learned is, you know, take care of your risk.
And everything else will take care of itself as long as you have an edge and you, you know, make sure that uh your risk is uh defined. Um, you know, that's really all you can do as a trader. Just take every trade. It's kinda like almost being the casino in Vegas, right? you know, uh you just wanna make sure you do have a slight edge and you wanna make sure that not one particular trade or one particular gambler if you're in Vegas, right?
is gonna take you out. So surviving the crash of nineteen eighty seven, being able to trade the day after That day after, Aaron, was by far my best trading day of my career, uh, because I was number one able to trade, probably thirty to forty percent of the traders were being taken out by their risk managers. So I'm trading against the risk managers and they don't care what price they pay or sell.
And, you know, if you were able to trade, if you had taken care of your risk and didn't get hurt by the crash, you were able to make back everything and then some the following day. So That really taught me the lesson that I live with to this day, which is, you know, uh, you know, make sure you number one, have an edge in whatever trade you have, and number two, make sure you have your risk defined.
and you know, get out when it's time to get out. So um from there I moved uh upstairs as kind of the world changed to more electronics. Uh started managing some money, had a little volatility arbitrage hedge fund. Uh now I still manage some separate accounts, more trading on my own now and employing a lot more of the technology that's just come aboard recently. Uh the other thing in this market is you absolutely have to, you know, change uh you know, Paul Tudor Jones who
uh actually made a ton of money in the crash and that was his claim to fame. But, you know, one of his saying is uh evolve or die. Uh and he certainly is, you know, a traitor that I try to uh you know embody. Another saying of his is losers average losers, which means, you know, don't just because it's a bad trade, don't add to it to dollar cost average. Getting out of a losing trade for a manageable loss
is the key to long term survival as well. So again, it's not, you know, being wrong, it's staying wrong that gets you hurt and that's, you know, what I've uh certainly learned along the way. So Uh, you know, that's kind of been my road till now. So I am, you know, uh managing some separately managed accounts, the fun post uh Bernie Madoff. uh you know hedge funds uh certainly uh aren't performing like they were and being in a hedge fund with the inability to
you know, have that uh transparency. Most people prefer what's called a separately managed account where you trade the same style but you're able to see your account every day, get your hands on it, look at it. So you won't have that kind of Bernie Madoff scenario where, you know, they can make up the reporting and so forth. So So I've uh you know, evolved as we go along. So uh I really I just love going in and I like the fact that, you know, every trading day is new and
you are judged every day by the market. It's very easy to tell how you did, right? It's not like a regular job. There's no politics. At the end of the day, if you're, you know, in the green, that's a good day. If you're in the red, it's a bad day. I like that with the market it has uh, you know, no mercy.
and uh i there's no uh BS so to speak in the market. So and I still love the culture of the market even though it's changed and the mentality of the people who tend to gravitate towards the market tend to be more I guess entrepreneurial risk takers
um, you know, okay with making mistakes and you know uh I think that's another thing uh probably for all the you know people out there is Make sure you can handle being wrong a lot if you wanna start trading, especially if you wanna start trading for a living. Because you're going to be wrong.
Probably more than you're right. Uh and if you're not okay with that from a psyche standpoint, it's something you know, you truly wanna maybe reconsider going into trading as a career. Yeah, no doubt. The numbers I mean, the numbers don't lie, do they? So I'm keen to just sort of take that back a notch and and talk a little bit more about how you were sort of learning.
So, uh, what was it like learning how to trade sort of from the heat of the pit?'Cause the majority of us sort of learn by the means of the internet now in sort of one way or another. So how did that work for you? Yeah, absolutely. And it was invaluable being actually on the trading floor and kind of getting my feet wet, not as a trader to start.
And I got to learn kind of how the trading floor worked without having, you know, money at risk, without really trading, but just getting a feel and knowing how things operate. And I did see right before the crash of nineteen eighty seven a lot of people coming in'cause the market was red hot.
you know, very akin to, you know, the late nineties, uh, you know, when the internet craze kinda hit, you know, where hey, this is easy to do, where they c came in and they couldn't even look at a screen and tell you what all, you know, uh the numbers on their men, but yet they were, you know, risking a lot of their money without even having an idea on how things work. So Um, you know, number one, uh it's changed because as you mentioned there, you know, now it's electronic.
and there really isn't a trading floor. I do some T V spots on the uh Chicago Board Options Exchange every Thursday and I mean there are two trading pits left on the floor. There's probably you know, hundreds of guys instead of thousands down there now. And it really has become a a pseudo ghost town and kinda sad to see but, you know, it is what it is. So Uh but in the old days, you know, the trading pits was as much about
a you know, being physical as it was about being, you know, uh if you will, intellectual or trading ability. I mean a lot of it was, you know, yelling the loudest, getting the attention and so forth. It's kinda what you see in the movies. uh, you know, where people are screaming and yelling. Most of the time, I will be honest with you, uh I think trading is ninety percent boredom, ten percent sheer terror, without much in between.
So a lot of the times you're just sitting around screwing around to be honest. Um, you know, uh you know, making stupid bets, doing s you know, it's basically daycare for adults a lot of the times. But when the market does start to move, you know, you have to be ready and you have to be prepared. Uh the other thing is uh we have gone from, you know, using fractions in stock and option trading to using decimals.
And it's much easier using decimals. I'll tell you that. I mean it's, you know, uh there were more cases than I care to admit where guys using fractions because we were using an options especially You know, where you're using uh sixteenths and thirty seconds, right? and trying to figure out what five thirty seconds, right, plus uh a quarter equals, right? A lot of guys would mess up the math. and, you know, end up uh basically screwing up the trade because they weren't mathematically inclined.
So there was a little different edge to having, you know, a fractional kind of mind. Now with decimals it's, you know, very easy, you know, everything's much easier to add. It's almost like you know, the cash register McDonalds that spits back the change to you or trying to figure it out in your head. So Uh but you know, the one thing uh being a trader on the floor versus being, you know, a trader, if you will, upstairs or a retail trader, a regular trader, let's call it.
you know, completely different environment. A trader on the floor is just looking to make money by buying on the bid, which, you know, is the lower price, selling on the offer at the higher price. So if for example the, you know, uh stock is, you know, uh one twelve bid offered at one thirteen, right? They're just hoping to buy at one twelve, sell at one thirteen all day long as orders come in and make that dollar spread to use that analogy.
Whereas from a retail standpoint, usually you tend to, you know, be directional in nature. You're saying I'm buying at one thirteen because I think it's going to one fourteen, so most retail investors tend to need to have an opinion to make money. Whereas most floor traders it's almost better not to have an opinion. You really wanna be hedged. It's almost like being a, you know, bookmaker.
uh you know where you wanna make sure that you don't have too much lean on one side or the other. Okay. That's that's really interesting. Just on that that sort of that learning process, though, I just had another question around that and I sort of feel like there's There's kind of an assumption that if you're a pit trader you make money.
Um but would you say you sort of experience the same struggles that many other traders go through when first starting out? Oh absolutely. I mean uh the attrition rate uh for traders is probably, you know, about eighty percent don't make it. Um, you know, either they blow out in a bad way, right? And I saw a lot of guys blow out, believe me. Uh some of'em deserves to be, other guys just happen to be caught with, you know, too big a position at the absolute worst time.
Uh a lot of guys just kind of eroded out where it you know, they didn't really lose or make a lot but it wasn't working out for'em. So You know, being a pit trader, you know, doesn't ensure success. You have to know what you're doing down there. You have to know basically you know, how to identify the edge and then lay off your risk, right?
and you're really looking to just capture little edges throughout the day. That's kind of what I'm doing upstairs now. You know, the world has changed. Most of, you know, the market makers are it's called upstairs, you know, in an office off the floor now.
And because of the technology that's available, you can really, you know, run a very similar operation, you know, upstairs as you do downstairs and capture that same kind of edge. So Um, but there again you do have to know what you're doing and you know, when the market moves against you you have to have quickly I think that's really what it comes down to, Aaron, is Um, you know, a lot of guys when they start to have it move against them, you know, are refusing to just cover for a small loss.
Uh, and then that's where it gets to be a, you know, big loss and then that unmanageable loss. Or they'll add to the position saying it's gotta come back. I'm right, the market's wrong. I've always expressed the opinion the market's the market. And I'm, you know, just trying to figure out what the market's doing. I don't know if I'm right or wrong. All I know is that, you know, if I do this over the long haul I probably will make money because there's an edge to what it's doing.
how the market moves I can't control. How I move is the only thing I can control. So A lot of market makers who don't make it is because they are, you know, again
you know, have that, you know, hubris, uh, you know, that psychology as I talked about in the first place, you know, where you have to be okay, you know, with being wrong a lot of the time. Um, because, you know, m like I said, you know, it's it's almost a you know, coin toss, but if your winners out uh you know uh weigh your l losers, you know, you make twenty cents and you lose only a dime, you can be right, you know, only one out of uh, you know, one point three times, right?
You know, you can lose a little bit more than you uh win, but because your wins bigger than your loss, you end up making money in the end. And that's really w the mentality you gotta expouse if you're gonna be a market maker on the floor. Yeah, that's really well said. And I just wanna make sure everyone listening is clear on this term, um, because I'm I'm, you know, positive it'll come up again. Could you just give us an in depth explanation of
Who is a market maker and what is their role? Yeah, and it's it's changed. You know, back when I was on the trading floor in the options markets, right, I would literally quote markets, right? And if someone came in Who wanted to buy or sell at those prices, I would have to facilitate that. So basically I would set the markets.
And if someone wanted to trade at the price, so I would say I would buy it at a dollar, sell it at two dollars to keep it simplistic. If someone came in and said, I'll pay two dollars, I was obligated, right? to sell at two dollars because I'm making a market in that particular option. Same thing with stocks, same thing with futures, you know, whatever in the trading world, they make a market. They will give a bid, a price where they'll buy at, right?
and an ask or offer a price where you will sell at. and you're obligated to buy or sell at that price. How much again is dependent, you can quote for a certain amount of shares, certain amount of contracts, whatever it may be. Uh, but that's what a market maker does. And usually the fair value price lies in between where you're willing to buy and you're willing to sell. So basically if someone comes in and pays two dollars, right?
Um, you know, you can sell it there. It's only theoretically worth a dollar fifty. You go out and hedge it. and then you've captured that little bit of edge. You've sold something that's worth a dollar fifty theoretically for two dollars and then you've hedged it off and then you just keep doing that day in and day out. Of course
The problem can arise if someone comes in and buys it at two and you can't get your hedge on because the market starts moving against you. So in this day and age with electronic trading and how fast things can move.
Uh I will tell you being a market maker uh is a much different and much dangerous and really less uh financially beneficial game than it used to be, I think there's a big advantage to being a market taker, if you will, being a trader who can just wait and, you know, not be obligated to be on the bid and ask spreads. So I think uh the market's really changed and the structure's changed. It's a great time for
you know, the retail guys here because, you know, you don't have to trade, whereas if you're making a market, if someone wants to trade with you, you're obligated because you've set a price on it. Yeah, okay. That's that's really great. So thanks for breaking that down, Tim.
Um, and it kind of leads into another point about change. So if I was to ask you, say, twenty five years ago, what was your edge, I'm presuming you would say something like it was the fact that you were sort of in the pit and just sort of amongst the action. But as we've recently seen the pit action sort of fading out and technology slowly taking over, where would you say you can now find an edge in the market? Yeah, edge is actually basically in the same manner, but not in the same place.
Um, you know, being an upstairs trader now we have technology. that allows us to identify, you know, either unusual activity or um you know bids and offers that are worth more or less than the theoretical price. And then we're able to view those and quickly act and say, do we want to take advantage of that or not? So, uh, you know, with the option scanning that I use at RB Trader, uh, you know, we're able to identify a lot of stuff, you know, coming in out there.
Um, that will give us, you know, a look at what's going on, very similar to being on the trading floor, right? So it's almost like bringing the pit upstairs. Um and they have a great web based scanner too that does the thing, you know, for the retail guys, um, you know, that allows you to, you know, jump in and kind of level the playing field as well. So the thing about technology is you know, it really does really give almost everyone the same kind of advantage.
Obviously, you know, the speed differential uh the guys who are willing to, you know, build a, you know, microwave tower on the top of a mountain to, you know, uh be able to be quicker by, you know, uh a nanosecond, right? You're you're never gonna compete in that game, the real high frequency guys, the latency guys. Uh but as far as getting, you know, information and stuff.
It it really is becoming more and more readily available as we move on here. Certainly news has become, you know, more available. Almost everyone gets the news at the same time because in this world everything is, you know out there in a matter of seconds. So it used to be You know, you got the news, you know.
many times hours before the public did and you're able to act on it. Now the news, I mean, if it's, you know, a second or two, that's a a long period of time. So everything is quick now and everything really has favored you know, um, you know, the small, the retail traders, the guys newer to trading. It's really a great time I think to get into trading from a level playing field aspect.
Um, you know, the high frequency where they're saying, hey, you know, they're, you know, f making, you know, uh half a penny on you, who cares, right? We're we're not gonna beat that game. But the benefits have so outweighed that. You know, the pit trading is uh a game of the past that's gone upstairs. But uh you know
the idea of being able to take advantage of order flow will always be there. Yeah, that's really interesting, Tim. So you talked about sort of scanning for trades there. So do you want to give us some insight on how you're actually scanning for your trades um, you know, sort of currently? Yeah, absolutely. I mean uh I use rb dash trader dot com. It's a basically an option scanning tool.
Um and you can go on the web and, you know, uh get a trial of that for free. But it will come up with what's called unusual option activity. It will have size activity, it'll have volume activity. So it basically takes all the trading that's going on at that very moment.
and populates it with something that's let's call it interesting, actionable, something that's, you know, unusual out of the norm. So you get big size, right? You get uh unusual, something that normally doesn't trade a lot, trading a lot. Um, so it provides, you know, the idea for, you know, trade generation and it provides that kind of edge that you're looking for. Uh you can also see what, you know, the big guys are doing out there in the marketplace and options.
And the nice thing about options and I'm sure, you know, a lot of the listeners might not be that familiar with it, but the options market is really starting to be a place where, you know, the big funds and the big players are starting to express their market viewpoints in a way they really hadn't done until just recently. Carl Icon probably is a name familiar to most uh listeners out there.
But a lot of his um, you know, plays that he's done recently has actually been with options. They were over the counter options for the most part, but those bleed through to the listed option market. So I think, you know, the option trading uh kind of uh uses is getting more and more predominant.
So it's I think the last kind of growing field out there. So uh if anyone's, you know, interested, certainly then get a hold of me, you know, uh and shoot me an email uh if you want any uh you know more information. But it is a way to you know, express your viewpoint by the big guys out there. Um and it really sometimes is a tell craft foods just had a recent merger Heinz, right? And uh about a week and a half before that deal was announced
There was huge volume in the options market. Uh, you know, guys were buying calls that these things normally didn't trade, you know, and sure enough, you know, a week and a half later, boom, here comes the deal. That's happening more often than not. I have no idea if it was, you know, uh insider buying, right? Uh but all I'm saying is that a lot of times you'll see
big volume coming to the options marketplace, unusual volume, and then a move foul in the stock. So it's a uh you know, way you can kind of uh take a look and see, hey, you know, this is uh Getting a little bit interesting out here. Maybe we want to take a look at. So it's a great way to generate trade ideas.
Uh, and it's also a great way if you trade, you know, kind of spreads like I do, to take a look at where prices get a little distorted as well. So and like I said, it's available for the retail guys out there. and it's uh, you know, really leveled the playing field. You know, options, uh, even if you don't understand, you know, the minutia of'em, looking at the options market to see how the stocks may react.
is many times a good use of the options market as well. Are you ready to get serious about trading? Then join Tasty Trade, Investopedia's best platform for options trading in twenty twenty six. Stocks, options, futures, and more. Tasty Trade has everything you trade all in one platform. Get low commissions, including zero commission on stocks.
so you can keep more of what you earn. Tasty Trade is packed with advanced charting tools, backtesting, a pre-built strategy selector, risk analysis tools, and more features to help you trade smarter. See equities and derivatives with high trading volumes, dividends, upcoming earnings reports, and more with their pre built watches. Or create a custom watch list to keep an eye on the companies and sectors that matter to you. Manage your positions with speed and precision using Active Trader Mode
one click trading and smart order tracking. Plus Tastytrad's Stellar Trade Desk team offers live support during trading hours if you need it. Visit Tastytrade.com slash chat for more info. KC Trade Inc. is a registered broker dealer and member of FINRA, NFA and SIPC. Have you ever watched a stock explode and thought, if only I had the capital? Or sat on the sidelines because your account balance felt too small to matter. Good news.
With Trade the Pool's limited risk platform, you don't need millions or even thousands to start trading the US stock market. Bypass the PDT and tap into over twelve thousand US licit equities. From penny stocks to big caps, ETFs, even the newest IPOs, and short anything you like, with zero locate or hard to borrow fees.
Start your evaluation, get funded with up to$200,000 in buying power so you can go big without risking your own savings. And now you can also have unlimited time to reach the profit target. It's a game changer. Not ready to trade yet? Trade the pool offers a free demo and educational resources. Practice on live data, master the platform, and build confidence risk-free before you even pay a cent. Click the link in the show notes to start trading with Trade the Pools Capital.
Sure. So those couple examples uh you gave in there, is that what you'd call unusual options activity? Because this is a common term in the world of options, so Do you wanna just explain that a little bit more? Like what does unusual options activity actually refer to? Yeah, absolutely. It's a you know, I mean our definition precisely is there's a term called
open interest, which in essence is, you know, how many of these things have, you know, traded kind of in the past. It's a look at that. So it's kinda, you know, like uh how many, you know, are out there that people have? And then unusual if all of a sudden, for example, with Kraft, there was I think about five hundred open interests. fifteen thousand of these contracts traded, right?
So I mean that's, you know, definitely unusual. Now if you had Apple, right, fifteen thousand contracts would be just a normal day because Apple trades so many options on a daily basis. So it's a you know, it really depends on uh, you know, the normal kind of trading activity and when you see a big pickup in volume, right? uh especially in one particular option. And if that buyer of the option is aggressively paying the offer price, paying the higher price, right?
That's showing that he really wants to get in. You know, that's even a bigger kind of, you know, uh interesting look, here's a, you know, big trade going on and this guy is just saying, I want in, I'll pay. whatever price. So that's what the scanning technology kind of allows us to identify. So, you know, big volume doesn't necessarily mean unusual.
if it's big volume and something that normally has big volume, that's just a normal day. And, you know, sometimes even say a thousand contracts, right, which isn't necessarily a big volume sort of option trade, but a thousand contracts on something that hardly trades is definitely an unusual option. Um so it's really a comparative. Again, we use the term open interest.
And compare that to the uh trade volume. With open interest again is a fancy way of saying how many contracts have kind of been out there already in the market uh that haven't been closed. Um it kind of gives you an idea on how much activity normally is for that option. And when, you know, that day's volume exceeds that by a, you know, factor of four or five to one, that then becomes, you know, kinda unusual options activity, something that doesn't normally happen.
And that piques the interest certainly to take a look closer to see what's going on out there. Okay. So once you detect that sort of unusual options activity Um, how early do you have to be to sort of detect that to be able to actually trade it and then profit from it like Is it too late? Uh like once you recognize the big volume sort of coming in that's out of the normal, um
A are you already too late to it? Do you sort of need to ant anticipate it building up to that or can you just sort of break that down a little bit further? Sure, there's two ways to play it and Uh I prefer the the second way that I'm gonna talk about it. The first way is you basically get into, you know, kind of the game of musical chairs where, you know, everyone rushes in and just keeps buying, right?
um you know, hoping in essence to sell to the next person who's paying a slightly higher price for it. So usually the how it works Aaron is the order will hit, right? It becomes kind of unusual activity. It's kinda, you know, out there now it becomes general knowledge and then there's people who think, hey, this is unusual activity. I'll follow along with it.
Certainly there's guys on T V and websites who just buy'em because they're unusual, right? Blindly just saying just because someone else is paying a lot for these I'm gonna pay a lot for these because he must know something. That's fine and that game can work and it can't work right. But at some point you're paying a lot for those options it drives what's called the implied volatility. Implied volatility a fancy way of saying the price of the option to really an extreme level.
So if you're, you know, too late to enter into the early stages, what you know we're doing is we are selling those inflated options and we're buying the shares of stock against it. So we'll buy the stock, for example, in craft. We would have bought the stock, sold the calls that people were, you know, overpaying, right, to get into.
And then basically wait for that buying to subside and you know that price will slowly come back in line, we're hedged with the stock and we kinda take the trade off. Um, that would be another way to play it. Uh you can do it certainly with spreads trades, but you're right. I mean, you know, jumping into the, you know, game of I'm just gonna jump in because this option's hot. That's a very difficult game to win in the long run because, you know, the f any time you're trading kind of a froth.
Uh you don't know how high it's gonna go before people say enough's enough. Okay, right. So let's move along a little bit to um just sort of some more general advice uh for for traders who are listening because, you know, I'm sure you've picked up a ton of lessons. over the last, you know, however many years. So
What would you say to any trader who is perhaps struggling with the psychology of trading? Like, how do you now deal with this aspect and keep motions under control? That's um that's a very tough thing. I mean that is and I've dealt, you know, I don't care how good a trader you are. you know, you are gonna have periods of drawdown. You're gonna have periods where, to put it bluntly, it just kinda sucks bad, right? And, you know, it it starts to spiral down and that's a tough thing to
you know, dig out of, but if you trade long enough you're gonna have, you know, hopefully many times that happens'cause that means you're gonna have many upswings as well. I'm a big golfer and it's akin to having kind of the yips in golf, right? You know, and the only way to cure it is to start making some, you know, short putts, right? Then your confidence comes back. So
You know, if you start to get beat up, it's number one, it's okay always to take a break, right? The market's open every day. You don't have to trade every day. Two, I would say bring your you know, position size down. I always use, you know, how my PNL is going to, you know, kind of increase or decrease my position size. Same thing I used to do when I used to play a lot of blackjack.
uh and poker, right? You know, when you're up money is when you should increase your bet, if you will. When you're down money is when you should pull back. Most people are exactly the opposite. You know, um I mean there's been studies on there as well. Kahneman and Tworsky, right, have a a great one where
You know, people basically do the exact opposite. When they're up money, they want to hold on to that. When they're down money, they, you know, start to say, I'm, you know, gonna throw be all in, right? Um so again, you know, just take a step back. It's okay, you're gonna have drawdowns, understand that. And, you know, uh the one thing I think if I had to have uh uh to remember from the podcast here is
Position size, position size, position size. So the way to control your risk, right, is not to be risky when you put the trade on. So position size accordingly. You know, have your stop in place, stick to your stop. Um, you know, again the nice thing about options is you can do spread trades that have defined risk. You know before you even, you know, get going what your maximum loss could be.
But if you're trading something like a stock or futures, you know, make sure when it hits your level you're out. If you can't pull the trigger, make sure you actually put that stop out there. but position size accordingly so if it does hit your stop level right, you can live with that kind of loss and just move on to the next trade. And you may have a series of losses
You have to understand that as well. And at some point, you know, stepping away I think is key uh to doing it. But you know, understand going in, you're gonna have losers, you're gonna have drawdowns. And again, if you have your position size in place those losses won't be the ones that really are kind of psyche ruining. You know, if you lose one or two percent, I don't think anyone's gonna be, you know, fearful of putting on the next trade. But if you lose ten or twenty percent
all of a sudden you get much more gun style. So that's why position size is absolutely vital. And I've seen, you know, people don't blow out uh, you know, because they're wrong. People blow out because they're wrong in a big way. Long term capital management, I might be uh, you know, uh talking to too young a crowd, but that was certainly uh one that blew out not because they were really wrong, but because they were wrong in such a over levered way. If you look at any of the great
blow ups in trading history. It wasn't being wrong, it was because they were huge positions. The London Whale we recently saw, JP Morgan. classic example, right? He was wrong, right? But he was wrong in a massively levered way. So it's that leverage, that too big a position, right, that kills you. It's not being wrong. So
Uh uh again, position size, uh, you know, if you even have to write that down. I have notes all over my trading screen to help me throughout the day and I've been doing this for, you know, many people say way too long, but I'm not quitting any time soon either. But I actually have little notes. That will help me.
you know, remember even after all these years to follow, you know, those rules and, you know, it's kinda like, you know, once you break it once, it's, you know, you don't want to make sure you break it again. So Um, you know, that would be my high advice to everyone, except the fact you're gonna have losers
except the fact you're gonna have drawdowns that, you know, it's gonna be lousy sometimes. And if you look back over the course of twelve months, usually all your money is made in probably two or three months. Usually uh six months you're kind of, you know, treading water. You know, another couple of months are probably losers. So, you know, it's inevitable you're gonna have periods where you're not doing much, inevitable you're gonna have periods where you're, you know, dropping a little bit.
But you know, the key is not to have those losses. you know, be so big uh that you know you even if you have gains you're not gonna get back to break even. So position size is everything and uh position size allows you to keep your psyche in place too when you go through the inevitable tough times. No doubt. I think that's that's super important. That was really good. So Let me ask you one last question and then we'll probably sort of start to wrap this up. So
What is it that you would say motivates you to trade after such a long stint in the game? Is it the challenge? Is it the lifestyle, the money? Like what would you say? Well, I mean the money is kind of you know, it's nice obviously. uh and you do need the money. But the money really is a way of keeping score and I'm a very competitive person.
Uh and I also love the challenge every day. I like the fact that it's really unknown every day that you go in. Uh I love the lifestyle. I love kind of the mentality that traders have. uh, you know, the ability to, you know I mean if you're wrong you get out and guess what, you get a fresh start again. That's rare in this, you know, kind of world, right? Where, you know, you can have fifty or sixty fresh starts.
you know, throughout the day, you know, and you just keep on keeping on and perseverance I think is, you know, a key uh absolutely trait of uh great traders. you know, to kind of uh carry on and, you know, it's also I really just love the you know, kind of the challenge every day of trading and the ability to find that kind of, you know, edge that trade.
where you just say, you know what, this thing, you know, worked out exactly as I anticipated. It's you know, it doesn't happen all the time, believe me, you know, but throughout all the years You know, it's uh again uh to use golf as an analogy, it's like hitting that, you know, uh great drive straight down the middle. That's what keeps you back golfing. You can have a series of not so great shots, a series of lousy ones.
But then you have those, you know, shots that you can just sit there and watch, trading very much the same. Uh and I like the challenge, the fact that it's not, you know, mundane, boring. Um, you know, uh every day is a fresh start, a fresh day. And it's really challenging mentally all the time. There certainly is no, you know, drudgery to trading. And uh
You know, I wake up every morning uh, you know, looking at the markets and kinda go to bed every night looking at the markets. So I do have a life outside of that. It's not awe consuming. But it is something that you know, uh, gets me revved up every day, even after all these years. So again, make sure you're revved up, but not for the reason for excitement, but for the fact that you're kind of passionate about it. There's a difference. If you're looking for excitement, I'd say go to the casino.
It's a lot uh cheaper. Um you know, trading is uh more of a business approach. I think you need to look at it more as a you know, kind of business approach rather than that excitement level approach. That's awesome. That's really good. So again, thanks so much for coming on, Tim. It's been um an honor to have you on. So I really appreciate you, you know, making the time to you know, for this interview. So
Before you go, do you wanna tell listeners where they can learn more about RB Trader and also connect with you? Yeah, absolutely. I mean it's uh rbtrader dot com. Uh the dash is soon to be gone. From what I understand, I'm not the uh I'm not the web guy by any means, but uh so it's rb-trader.com. And then if you want any information, I've also started a new initiative, Delta Derivatives.
The website will be launched soon. But if you need any information, we're also offering some free research if you want, or just general questions. You can just uh email marketing at rb trader dot com. Uh and just say you heard uh, you know, me and Aaron talking and you're interested in, you know, some free research or if you have an options question or
You know, anything at all. I love talking options, especially with people who are new and interested in it. So uh again, marketing at rb dash trader dot com and uh whatever you have, there are no uh bad questions. And uh if you have any interest, hopefully you have you get the fire lit and you know, have the passion uh that gets you through the tough times. Awesome. Yeah, that's that's really good. We'll put all those links in the show notes of course at chatwithraders.com.
Would you be open to, you know, answering questions? Uh maybe if people just leave a comment on the site that might be uh just as easy. Are you open to that? Oh absolutely, I love that. Uh and more the merrier. I mean there are no bad questions. So if you're brand new and you have any question on it, I love to, you know, answer'em. Again, you know, uh it's akin to, you know, I am not a doctor, right? But if I had a medical question, I would ask my doctor, right?
You know, uh you know, if you're interested in options, you know, you don't have to be an options expert, but you would ask a question about options. So, you know, feel free to ask anything and I will make sure they're all answered because We all started at the ground floor. I know I did. And I know where it brought me, so uh hopefully you you know, get the same kind of passion out of it than I did.
And if you do then I consider it a job uh well done on my part. Okay, that's awesome. I really appreciate that. So let's let's make that if you just go to chatwithraders.com forward slash Tim. Um, you'll go straight to the page, scroll down the bottom, leave a question in the comments and uh Tim will keep an eye on that to sort of answer any questions you might have, um, especially in regards to options.
Absolutely, Ben would love to. All right, awesome. And if you want to check out more, just go to rbtrader dot com and of course those links will be in the show notes as well. So Thanks again, Tim, and let's keep in touch and we'll speak soon. Appreciate it, Aaron. Take care and thanks everyone for uh the time. I I really liked uh doing this the first time and hope to do it again soon. No doubt. Speak to you soon. Thank you. Bye bye now.
You've come to the end of this episode of Chat with Traders, but don't worry, more great episodes are on the way. iTunes, and we'd love it if you leave us a rating and review.