Lawrence G. (“Larry”) McMillan is this year’s recipient of the Joseph W. Sullivan Options Industry Achievement Award, to be presented at the 29th Annual Options Industry Conference in Savannah this week. He is also the author of Options as a Strategic Investment and the president of McMillan Analysis Corporation, which he founded in 1991. He spoke with JLN Options editor Sarah Rudolph in advance of the conference, which begins May 12.
Q: Congratulations on receiving the Joseph W. Sullivan Options Industry Achievement Award. You will be in good company. You have been involved in options for a long time – since they started trading in 1973. What led you to options and what was the market like at that time?
A: Actually my broker called me up, because we had a good relationship, and he said, you should take a look at this new product, options. I was a programmer and had been a math student, so it seemed like a natural fit.
When options first started trading I wasn’t on Wall Street yet. I was at Bell Labs. I was trading convertible bonds, a few stocks. I picked up options pretty easily. There weren’t many books about options trading at the time. So I just started playing around with the numbers and figured it out mostly on my own. I did some research programs with the Black Scholes model. You had to read the research in mathematical journals, and it was difficult to read. Then Fisher Black wrote a more easily understood article in 1976. That got people using options.
Q: Do mathematicians tend to be better at options?
A: The whole derivative nature of things relates well to someone who is a logical thinker. I think people who have trouble with options have trouble making the connection of what a derivative is. That’s why equivalent strategies or equivalent positions are necessary for understanding.
Q: What prompted you to write Options as a Strategic Investment?
A: When I was still at Bell Labs I had started a newsletter I published on the side on options strategies. Ivan Boesky was one of my subscribers. I was writing a newsletter with educational articles in it. My same broker called me up and said their firm was looking for a retail options strategist for Thompson McKinnon Securities. I got the job and started working on Wall Street. They had a retail options letter they published weekly, which they sent to CBOE among others. In about 1978 the New York Institute of Finance wanted to do a book on options, so they went to the president of CBOE at that time, Jim Dalton. Dalton said, “There’s a guy over at McKinnon writing about options strategies,” and put them on to me. They wanted an in-depth book on all the things you can do with options. I submitted an outline and that’s how it started.
Q: You have a forthcoming book about volatility and options co-authored with Richard Lehman. Why has trading volatility become so popular?
A: The first edition of that book was about covered writing, but now that volatility products have come into being, it’s about various strategies you can use to hedge a portfolio of stocks. And Rick wanted to do a second edition.
Q: You are President of McMillan Analysis Corporation, which you founded. What does that role involve?
A: I stayed at Thompson McKinnon for 13 years trading the firm’s money. They ran into financial difficulties after the crash of 1987, sold some of the company to Prudential, and went out of business. I was at Prudential for a year and a half, and then I started this company.
We’re a small enough company that everybody does everything. We do research and recommendations in our newsletters, we manage money for individual accounts, we do a lot of educating, we have a mentoring program and educational DVDs.
Q: How has the use of various options strategies changed over the past 20 years since you began publishing your newsletter?
A: Options trading is basically the same, but people have added a class of new volatility derivatives. Within a class, however, the strategies are the same. There are a lot of things you can do with options, either trading volatility or price. Those are basically the two things professionals do. In modern days we’ve gotten much more sophisticated about what volatility is and how to use it. That’s something non experts in options don’t really understand.
Q: What misconceptions about options do you encounter in your role as a money manager?
A: For the most part, the people who want us to manage their money are beyond the novice stage. They know what has to be done but they don’t have time to do it. In general, the people who subscribe to our high end newsletters or come to us for money management are wealthy, self-directed individuals who do own trading. They use us because we make recommendations in our newsletter or we actually make the trades.
Q: How is the options industry changing right now, or how do you think it will change in the next ten years or so?
A: Well, this whole volatility class is going to grow a lot. In theory, when puts were first listed in 1976, the exchange said eventually there would be puts on everything, but people couldn’t conceive of that. I think some day you’ll probably have volatility options on anything that has listed options. That’s where the big growth will come from. People will always try new products; the commodities space especially has tried different things over the years. Some survive and some don’t. But that volatility class will get bigger and bigger as people understand how the products work.
Q: Helping people to understand how various options products work is one of the goals of your newsletter, yes?
A: We run a number of articles explaining the nuances of trading options. Some subscribe just for the education level. We do try to put out some meaningful research and not just rehash old strategies.
A lot of people are more intimidated by futures because of the risk. But to me the futures are pretty pure, and there is no insider trading. Options are a derivative. What always appealed to me about options is you can construct strategies to make money without necessarily predicting a stock price.
Q: Do you have any favorite strategies?
A: We’re basically sellers of options and users of volatility as a hedge.
Q: Are you looking forward to the Options Industry Conference?
A: Yes, although I haven’t done my speech yet. It’ll be a short speech.