Start trading career as an equity option trader?

[mizhael]

Quote from cvds16:

maybe it would be a good idea to take the 'big talk' a real big notch down if you don't know the difference between them.
As an aside something to think about: most big traders I know are quite humble.

Sure! I fully admit my ignorance. Thanks for your reminder. On the other hand, I was trying to explain my aspiration as to the previous question of why bother asking about 200K vs. 250K stupidly.

 

[MTE]

Quote from mizhael:

Hi all,

What are the skillsets that will be developed from starting my career as a trader on the equity option trading floor in a bank?

And what are the exit opportunities in the future for further career developments?

I aspire to be a successful hedgefund manager/owner in the future.

Are there any star hedgefund managers that are from equity option/derivative background?

I have heard that star hedgefund managers/owners come from the following backgrounds:
(1) Stock picking & timing;
(2) Commodities;
(3) Fixed income markets;
(4) Quant & high frequency algorithm programing trading;
(5) M&A, corporate finance and distressed.

I cannot seem to find star hedgefund managers/owners who started from equity (index) option traders...

I am wondering if those skills such as greeks, straddles, etc. are useful for building my own fund successfully.

I am weighing between the career as being a sell-side equity option trader vs. a (high frequency) quant trading strategy analyst in a top 10-20 quant hedgefund (I enjoy equally both C++/Java programming, as well as econ/finance and math/stochastics).

Any thoughts? Thanks!

Greeks and straddles are not skills, these are just a bunch of sensitivity measures and an option position!

 

[dr_sean]

Quote from mizhael:

Very informative. Thanks a lot for your valuable inputs!

Quants can go to stat-arb, or high frequency shops. The stat-arb guys research on finance literature and design trading strategies, which can be fun too. The high frequency guys are essentially market-making, using speed as an advantage. And they can make consistent and stable return even in bad days, due to their short term nature of risk taking. It can be fun too.

It's great to know that Steven Cohen starts in option trading. He's one of my models. :=)

I will have to find out more about the position. What's the difference between sales-trading vs. market making vs. directional trading?

The ultimate question is: given the same guy, and the same amount of intelligence and devotion, which direction and skill-set should we start with and build upon, in order to lead to the maximum future investment gain and fun?

After a certain threshold, personal money is not something we are concerned much any more. It's the joy of beating the market and taming a wild beast that matters. That's why I ask these questions. If you are a shark, you like deep water, right?

here is a fun little quote from Wikipedia about Cohen: "After Wharton, Cohen got a Wall Street job as a junior trader in the options arbitrage department at Gruntal & Co. in 1978. On his first day on the job, he made an $8,000 profit, and eventually was making around $100,000 a day for the company."

full link here:
http://en.wikipedia.org/wiki/Steven_A._Cohen

Anyways, yeh I know all about the different jobs from quants but what I'm saying is this: if you get started in a job (and maybe a nice paycheck) where you are doing development/programming and/or modeling, you are a spoke and not a hub, and the money makers who you want to network with are going to view you as help, assistance. Where I've been they don't even call them quants they just say "code-jockeys" etc. If you interested, read the book So You Want to be a Quant. What I think you'll find there is that the quants are, and no offense here, geeks. Now, in the book, you are reading about a select group of guys who really made something of it, and they did so by being so intrigued and passionate about their practice that they basically invented something major and consequently rode up to management or started their own gig. So to me, unless it's a quant-trading route (which isn't very common although that language gets thrown around a lot on the job sites to pull in would-be programmers), then you're taking a pretty indirect route to the big picture of being a producing trader/sales/trader/broker/asset raiser etc.

On stat arb: I know some of the Jane Street guys who do Stat Arb yes it is quantitative but much more simple than you would think. In fact it is, in my opinion, a paradox to call it an arbitrage of any sort they are pairs traders nothing more. Read up on the dynamics of pairs trading what you will find is that it can be synthetically broken down and when you do so all you are doing in pairs trading is shorting divergence, which is basically a naked unit selling strategy i.e. pick up pennies at a time but one correlation gone wrong will make you pay for all of it. The JSC guys I'm talking about too they are traders they came in as traders yes they are very quantitatively oriented but so is everyone there and at most legitimate firms; but they would never consider a non-trading job and that's the point I want to make.

lastly: on the different jobs you can have on an options desk at a bank / sell-side:

directional trader: you are just a prop trader who uses options. IMO unlikely that there are many of these guys around if any in the same dept as the rest, if they are around they are probably working out of a hedge-fund / asset management group within the bank. But these guys just trade options as a form of their strategy for instance say Morgan believes company X is a takeover target they get an options guy to sell ATM vol and buy upside.

market-maker: this is what all the major prop firms do and what plenty of the banks do too: quote the market all day long and make trades on their quotes. e.g. the SPX Jan 900 call is currently 22 bid, 23.60 offered. That is a market maker streaming those quotes and there are hundreds of more market makers on the phone and on the floor who stand ready to trade size at those levels. As the market moves so moves their quotes and as paper shows more or less interest in buying/selling vol they move vol accordingly. They hedge deltas with futures continuously the objective being to be as close to delta neutral as possible 100% of the time. Their risk is vol and they try to hedge that too by just not selling or buying the board and hedge their options with options.

sales trader: from what I know I think this is the most major component of a sell-sider's options desk: they work order flow and execute for customers at the best prices they can. The vig they make is commish but make no mistake they do very very well, and a lot of good experience from working order flow all day long and seeing what strategies the crowd takes.

hope this helps, come back w/ thoughts, questions, comments, rebuttal (LOL)

 

[mizhael]

Thanks a lot Dr_Sean.

Belated Happy New Year to you!

Sorry it took me so long to digest your post and reply -- I just came back from a vacation trip.

Q1. "Cohen was making around $100,000 a day for the company. " How did he do that?

Q2. Do you know why RT was performing so well this year? Is it due to their stat arb group, or high frequency market making group?

Q3. Finding good pairs-trading strategy and finding good pairs is not easy, right?
I heard Jane Street guys are doing pretty well?

I am not sure if this type of "simple" quant trading strategies will be the most successful trading strategies in the future? I heard DEShaw is also doing well in 2008?


Q4. Out of the three types of sell-side option trader jobs, which one has more monetary potential? And which skill-set is the most beneficial for the future career development as a fund manager?

Thanks a lot for your sheding lights on me. I've learned a lot from you!

 

[CBuster]

Quote from mizhael:

Thanks a lot Dr_Sean.

Belated Happy New Year to you!

Sorry it took me so long to digest your post and reply -- I just came back from a vacation trip.

Q1. "Cohen was making around $100,000 a day for the company. " How did he do that?

Q2. Do you know why RT was performing so well this year? Is it due to their stat arb group, or high frequency market making group?

Q3. Finding good pairs-trading strategy and finding good pairs is not easy, right?
I heard Jane Street guys are doing pretty well?

I am not sure if this type of "simple" quant trading strategies will be the most successful trading strategies in the future? I heard DEShaw is also doing well in 2008?


Q4. Out of the three types of sell-side option trader jobs, which one has more monetary potential? And which skill-set is the most beneficial for the future career development as a fund manager?

Thanks a lot for your sheding lights on me. I've learned a lot from you!

dude - you need to rethink your approach here. first of all - can you confirm your background. i hope it's (expected) top degree from a top uni / biz school else you are unlikely to find a job in a major IB trading options anyway.

that aside, you are asking some reasonable questions but they are very newbie in nature. that is fine as everyone starts somewhere. but anyone with aspirations to be a hedge fund star should be doing some of their own research, not just asking lazy questions.

asking "what is the difference between market making, directional trading" etc etc is the equivalent of me going to a medical website and saying "I want to be the best, most famous doctor in the world. Now can someone explain to me what an asprin does?" You would be laughed off...

you need to focus, for now, on your entry point to the industry rather than your exit point - most struggle to even get in the door. once you have a trading (i agree it's important to be trading, not just analysis) position, if you are doing well (making big and scalable $$$) you will be able to start a hedge fund whatever your trading discipline.

FWIW DEShaw had a mixed year in 2008 - the flagship fund did very poorly but their market making arm had a good year (from what I've read)