An Interview with Joe Corona, Tony Saliba’s Head Trader
I’ve twice gotten the chance to watch Joe Corona in action as he runs the day-to-day trading operations at Tony Saliba’s firm. Joe is a 20+ year veteran of the markets who plays this game intensely but also very conservatively. Tony Saliba has a reputation of being a low-risk options trader and Joe impeccably executes this low-risk approach. But, when you watch him in action, you can very much see the ex-college football player in him. When you’re 6’6″, weigh … (never mind, he’ll kill me), and are as animated as Joe is, it’s quite an exciting and memorable event to watch him do his business. I got the chance to interview Joe earlier in this month. He’s the first options trader we’ve interviewed for this column and there is a good reason for this. I hope you enjoy and profit from our discussion.
Larry Connors: Joe, how did you get started in the business?
Joe Corona: By accident, actually — I have a teaching degree. While I was looking for teaching jobs, in order to make a little money, a friend of mine got me a job as a runner on the CBOE.
Connors: This was after you came out of Northwestern?
Corona: Yes.
Connors: You played football for Northwestern, is that right?
Corona: Yes, I graduated and then I was on the floor of the CBOE. I had no interest in the business at all. I was just down there to make a little bit of money while I was looking for a teaching job. As I was there, I began to figure out what was going on, had a look at the business and the people in the business and decided, “I can do this just as well as they can.” So I decided to stick around.
I went from a runner, to a phone clerk, to a broker assistant, to a trader. I didn’t want to be a broker so I hooked up with some market makers as an assistant. Later on, I got some backing as an arbitrage trader where I traded options on the floor of the CBOE, arbitraging options vs. the stocks. So that was really my first trading job, I think it was 1982. I was an arbitrage trader for a New York firm.
Connors: And from there?
Corona: From there, I stayed on the floor of the CBOE oh, until 1984, and at that point they introduced options on Treasury Bond futures at the Chicago Board of Trade, I’m not sure exactly when those were introduced, maybe 1982 or 1983, and they were beginning to pick up.
I was kind of dissatisfied with my situation on the CBOE so I hooked up with a guy who was looking for people on the Board of Trade to trade the bond options and I went down there and started to trade bonds. I traded those in that small partnership through 1985 and later on, we cut a deal with a clearing firm to start an operation where we could bring in traders, train traders, manage the risk and basically form a floor-wide trading group. So we started to deploy traders on the futures options pit on the Chicago Board of Trade and this went on through 1986 and then we got memberships on the Chicago Mercantile Exchange and did the same over there.
Connors: And from there you joined Tony Saliba?
Corona: No, I’ve been associated with Tony for a long time in kind of an arm’s length way. In or around the early 1990s, Tony started his school where they would train traders, bring in teams from overseas or domestically — mostly bank people — and train them to run a book: how to make markets in options, how to manage the risk in the positions they accumulated, and how to modify the risk and basically detoxify the positions they were carrying, and so on.
I’ve known Tony from the floor because when I was on the CBOE, I traded in his pit, Teledyne and Johnson & Johnson, quite a bit. Back in 1982, 1983 and 1984 when I was on the floor of the CBOE. I can’t recall how we hooked up but I came on board as a teacher from time to time. I would teach his courses, training people how to manage a market-making business, basically, from a banker’s standpoint. I taught for Tony quite a bit all through the 1990s but I wasn’t really associated with him in any sort of trading sense. I still ran my own trading businesses. I worked in my own jobs during that time. I didn’t officially become a partner with Tony in trading until May of 2000.
Connors: You just launched a hedge fund, correct?
Corona: Yes, we launched it. Our first day will be Friday (Feb. 8, 2003. Note: This interview was conducted on Feb. 4). I’ve just been working on that for the past few months — we’ve been jumping through all the legal hoops, all the marketing hoops and all the regulatory stuff. There’s a lot of interest because it’s one of the few funds that uses options pretty actively.
Connors: Why do you predominantly use options as opposed to the underlying?
Corona: Well, we’re going to use them in combination, and I think that’s probably one of the most powerful ways you can use it. It’s a situation where we are going to use the options to modify risk on our underlying portfolio. We are going to have a core portfolio, more or less like the Dow and S&P, but we are going to modify the exposure of the portfolio by using the options.
Connors: What would make you go long or short the Dow or the S&P. Do you use specific models?
Corona: We have a strategy which is going to have exposure to the market. It will have a delta between zero and one in terms of market exposure. It’s never going to be short. It’s going to be a strategy that’s going to be geared for a sideways to choppy market and maybe a slightly higher market. We did that on purpose because that’s the kind of market we think we’re going to have for the next couple of years.
And then we’re going to then take the portfolio and we’re going to have different sectors weighted different ways: Some will be overweighted, some will be underweighted, some will be neutral. And we’re going to modify the exposure to the market based on the location of the options, what strike we use, what month we use, and things like that. And we are also going to trade it and use the timing systems that I’ve been using over the years to signal when we need to modify the exposure to the different components of the portfolio.
Connors: So let’s take the S&Ps, for example, and play it out. How does it work?
Corona: Well, for example, let’s say that I got a buy signal on the S&Ps; our fundamental research was neutral on the S&P as a whole and for whatever reason, I got a buy signal which indicated that we want to be exposed to the S&P. We would then take our volatility and option research and we would locate which were the cheapest options and which were the most expensive and we would go in and we would buy S&Ps and we would purchase some puts and the strike of the puts that we purchased and the expiration date of the puts that we purchased would depend on our volatility research — what we deemed to be the relatively cheapest put for the position.
Connors: So is it essentially buying insurance off the position?
Corona: The positions will have downside limited risk at all times, meaning when we are long stocks, we’re always going to have a protective put in place. What’s going to change is which put it is and where it’s located – it could be a short-dated put that’s fairly close to the money, depending on what we think of the market and basically what’s the market’s giving us. It could be a longer-dated put and farther away from the money, depending on how we view the stock.
And we will almost always – not always, but almost always — be short and upside down the money call. So basically, if you take these positions together, they become a vertical spread and a diagonal spread, synthetically, so it’s a limited risk vehicle – limited risk to the downside and limited return to the upside — that’s going to be constantly modified and constantly manipulated and traded against.
Connors: And the goal is to make a small amount of money every month?
Corona: Yeah. If we can come out ahead 2% a month, I would consider that fantastic. You know, in the beginning, it’s going to be very conservative and I’m not going to be trading it that actively. A chess match is what this hedge fund is going to be. So we’re just going to take what the market gives us; we’re going to be analyzing the underlying, in and of itself, both fundamentally and technically, and also we’re going to be analyzing constantly the options on those underlyings, looking for novel ways that we can exploit it.
Our edge is the fact that we’ve got very strict volatility analysis; we’ve got very powerful technical analysis; and our execution systems allow us to execute probably in the mid price rather than trying to offer at a bid in the options market.
Connors: You mention your technical or market-timing analysis is superior – what are the components behind that — how does that work?
Corona: Well, I mean a lot of them are fairly simple. There are a group of them and the more they agree, the more powerful the signal is. A lot of them can be as simple as standard deviation bands, simple overbought and oversold indicators. A lot of it has to do with mean-reversion type of analysis. As you probably know, I am a big fan and a big user of the Market Profile.
Connors: For the people who don’t know what that is, what is Market Profile?
Corona: Market Profile is a form of technical analysis that was introduced by Peter Steidlmayer on the Chicago Board of Trade; they used to call it the liquidity data bank. People who worked on the Board of Trade in the mid-80s are really familiar with it and maybe other people. It’s a form of technical analysis where each time period is assigned a letter and the market is broken down into time periods.
Connors: What other strategies do you use for market timing?
Corona: I look at volatility quite a bit, as you know.
Connors: The VIX, or volatility itself?
Corona: I look at the base level of the VIX, the VXN – and I also look at the shape of the skews of the major indices – the steepness of the slope of the S&P options and the OEX options to try to get an indicator of market psychology.
Connors: The steeper the slope, the more…
Corona: The steeper the slope, the more scared people are and the greater the chance that you are nearing some sort of climax – so for example, if I had a base position on and the skew got really sharp, it got really steep to where it was within 90% of its historical high, I would look to make modifications to the position such as selling the puts that we hold and buying puts at a much lower strike, to modify the positions.
Connors: You basically never make directional bets if you’re hedged at all times.
Corona: We’re hedged at all times. The first strategy that we’re launching is a bull strategy, very mildly, a very passive bull strategy but the difference between a mildly bullish strategy and letting it run by itself is that we are making constant modifications that we think can add additional return, you know, by manipulating the options, by basically swing trading it and making adjustments when we get signals, we think that our strategy not only will perform well in a bullish environment – which we may or may not see this year, you know I’m kind of skeptical about this myself – it also should perform fairly well in a choppy environment which I think we are more likely to see this year.
Basically, the great thing about options and the reason Tony and I like to use options is that you can constantly turn them into something different as your opinion changes. You know, I can turn calls into puts; I can turn puts into calls depending on how I apply underlying positions; I can turn them into spreads.
That’s what’s really appealing to us is that we like to play chess with the positions. You know, figure out… if we are going to have a core position on a portfolio of stocks, protecting them with puts, researching which is the optimum put to use as a protection and also which is the optimum call to sell against it. So we’re constantly looking for the most expensive and the most overpriced calls to sell against our portfolio, we’re looking for the most inexpensive puts to own. Then as the markets change, we’ll change the insurance.
Connors: For someone who doesn’t know how to do that – to find the most expensive or least expensive calls and puts, could you just briefly go over that for someone wanting to get involved in options?
Corona: Here’s what I’d do: I would start out by reading Tony Saliba’s book,”The Options Workbook,” then Sheldon Natenberg’s book, “Option Volatility And Pricing,” and I would also read Nassim Nicholas Taleb’s book, “Dynamic Hedging: Managing Vanilla and Exotic Options.” Then I think what you need to do is look at a site like https://www.IVolatility.com where you can see historical distributions, volatility and historical highs and lows of volatility over different terms and try to get an idea of — just like the market, cheapness and richness are all relative –