(Extracted from The Business of Options by Martin O’Connell)
When I left the corporate life to become an independent CBOE marketmaker in 1977, I considered myself to be a real adventurer. I wasn’t going to spend my career as a cog in a big wheel, and I wasn’t going to depend on other people for my success. I was going to be a modern-day Attila the Hun. I was heading for the trading floor to make my own opportunities. It didn’t take long for me to figure out that I had the wrong idea. On the trading floor, I couldn’t make anything happen. My chance to prosper was completely dependent on finding inefficiencies in option prices, and I had nothing to do with any of the prices becoming inefficient. Instead of a man of action, I had to become a man of reaction. I had to hustle and be alert for any apparent edges that might appear, and then I had to execute positions, manage the risk, and hope the apparent edges were real. Rather than modeling myself after Attila, I began to try to think more like a firefighter. A firefighter must fight fires when the fires decide to appear. If he’s on duty, he can’t just choose to fight them when he’s in the mood, and, presumably, he can’t start one when he feels like some action. Too many traders and organizations tend to overtrade when opportunities are slim or to shy away when they should be active. The strategies described in this chapter all require market inefficiencies. It is important to remember that the market doesn’t “owe you” inefficiencies in any particular strategy. Even if it gives you some available edges, they don’t have to suit your personal trade orientation. Likewise, if this is a business, when the “fire” starts, you have to be professional enough to participate, even if, at the time, you don’t have an appetite for that kind of action.