Many investors have referred to Max Ansbacher as a "living legend" in the financial industry. He literally "wrote the book" on options trading, writing "The New Options Market," the first book written on exchange traded options, which ultimately became one of the all time best selling books on the subject. Frequently quoted in financial publications, regularly seen on Bloomberg Financial TV, the inventor of the Ansbacher Index, prolific author, philanthropist, and extremely successful trader, Mr. Ansbacher is a prominent figure in the financial world. In an effort to better inform investors about Mr. Ansbacher and his firm, Ansbacher Investment Management (AIM), Vision conducted this candid interview with Mr. Ansbacher. In this highly informative session, Mr. Ansbacher provides a great deal of insight into his background and trading techniques, as well as sharing useful tips for the aspiring trader. Individuals wishing to invest with Mr. Ansbacher must first carefully review AIM’s most recent disclosure document.

Vision Before we discuss your trading and professional career, could you please tell us about your personal background and interests?

Ansbacher I graduated from the University of Vermont, then went on to graduate from Yale Law School and obtained a graduate law degree from New York University Law School. Although I haven’t practiced law in over twenty years, I am still a member of the Bar in New York and Vermont. My wife Christine and I live in New York City in the heart of the Upper East Side of Manhattan. I serve on the Board of Directors of The Fortune Society, which helps people who have completed prison terms to return to society and become law-abiding citizens who can then lead useful, productive lives. I’m also on the Board of Directors of the Burden Center for the Aging, which gives assistance to poor and lonely elderly people.

My favorite activity is playing tennis, which I manage to do about three times a week. Another pastime is singing, and I am pleased to sing bass with the University Glee Club of New York City, which puts on two concerts a year in Lincoln Center.

Ansbacher While I was in my last legal job, I became fascinated with exchange traded options, which were then just being introduced. I started writing them for my own account. In the beginning, there were no put options, so the only ones I could write were calls. It turned out that this was in 1973 which was the beginning of the biggest bear market in decades, so selling calls was a great money making proposition. That experience got me hooked on options.

In fact, I found the subject of options so exciting that I decided to write a book about them while I was still a corporate lawyer. When the book was published, I figured that I ought to be able to succeed in a career as a stock broker specializing in options since I had literally "written the book" on the subject.

Ansbacher My book is written in plain English which any reasonably intelligent person can understand. Not only do I explain the basic concepts in clear language without any complicated mathematical formulae, I also present a number of easy to follow rules for each strategy. I believe it was a combination of these factors, which made the book the best selling option book at the time. Unfortunately, the book is not currently available; but I am about to start writing a revised version, which is under contract to be published within two years.

Ansbacher I first got interested in futures when stock index futures were introduced. Since I had had some success in trading the stock market, I thought it would be interesting to do the same thing with the leverage offered by futures. Then later, I found out that there were real advantages to writing options on a futures exchange as opposed to doing equity options.

Ansbacher The reason I choose to write stock index options in a futures account rather than in a stock account is that the margin requirement is significantly lower. Since I normally only use a small portion of the available margin, you might wonder what difference it makes. There are two answers.

The first is that the margin requirement for selling uncovered options in a stock account at most brokerage firms is so high that it becomes almost impossible to make very much money with that strategy.

The second reason is that margin requirements for uncovered options are not fixed as they are for many securities and futures, but rather change radically with variations in the price of the underlying securities. This means that there may be plenty of excess margin when I put a position on but, due to market action, the margin requirement can later increase dramatically. In a stock account, this could force me to close out a position against my wishes, whereas in the futures account, I would have ample margin to retain it.

Ansbacher My prediction of a bull market was based upon a very simple concept. Namely, that the P/E ratio of the stock market then was very low and had been for years. At the same time, the earnings of corporations were increasing each year, while stock prices remained constant or actually went down. I saw that this could not continue indefinitely. I concluded that what had to give was that stock prices would have to go up.

Ansbacher I love the excitement of being interviewed on national television. The topics which I can discuss are limited by the fact that the interviews on TV are quite short. On Bloomberg TV, they are 2 minutes and 40 seconds, which doesn’t give one much time. I usually give my general opinion of the stock market, explain briefly what The Ansbacher Index is and give its current number. Then I may discuss the volatility in the market and how it effects my strategy of writing options.

Ansbacher The Ansbacher Index can be a useful statistic in helping to forecast where the stock market is likely to go in the next four to eight weeks. The Index measures the relative prices of out-of-the-money puts and calls on a stock index. In theory, the price of a call which is, for example, 35 points out of the money, should be about the same as a put which is 35 points out of the money. But in practice, the prices are usually quite different. I believe that this is due to the fact that options buyers tend to form a consensus as to where the market is about to go.

If the consensus is that the market will go down, they all buy puts, with the result that the price of the puts will become much higher than the price of the calls. I believe that whenever there is a strong consensus that the market will go down, it probably will not go down. So I give my Index a contrary interpretation and, if it shows that options buyers are buying puts, that is bullish for the market; and if it shows that they are buying calls, then that is negative for the market.

Ansbacher First, let me say no one can completely control volatility when they are writing uncovered options, and the fact that I may have had low volatility in the past, does not guarantee that I will necessarily have it in the future. However, I do try very hard to control volatility, and the way I do that is with my Four Point Risk Control Program. The four points are:

1. Only write a small number of options, in my case generally less than 25% of what the margin rules would entitle me to write.

2. Sell only out-of-the-money options. Frequently, I will write options which are over 10% out of the money.

3. Monitor the current market value of the options which I have written so that they are a reasonably small percent of the equity in the account.

4. Probably the most important point is that I enter a GTC stop loss order on the floor of the exchange for each option which I have written, so that if the price of an option goes against me too much, it will be closed out at the current market price. The use of stop-loss orders does not guarantee that your loss will be limited to the intended amount. Certain market conditions may make it impossible to execute such orders.

Ansbacher I became a CTA because trading my options writing strategy is one of the most exciting activities I can think of. It is mentally stimulating, fun and, usually, profitable. The thought that I could do something for a living which gave me so much satisfaction and, most importantly, could be helpful to others, was just too compelling to ignore. The fact that I could earn a nice sum if I were successful was the icing on the cake!

Ansbacher I signed the exclusive agreement with Vision because of their stellar reputation in raising capital and helping in administrative work, which my office is not equipped to do. The trading itself is not a problem because I basically trade one position for each $25000.

Ansbacher Yes, for the most part, I trade the same positions for my managed accounts as I do in my own account. The primary difference in trading my account and others is the selection and allocation of a different number of positions based on the size of each account.

Ansbacher The two tips I give people from my own experience are not to try writing uncovered options and not to buy options.

I believe amateurs shouldn’t attempt uncovered option writing. It is considered a high risk strategy and, to be successful, I believe, requires a high degree of skill, experience, and market savvy. In fact, most brokerage firms tend to discourage clients from doing it. Writing uncovered options can be a trap for the inexperienced due to the fact that at times it seems like a very easy way to make money. Let’s say you start selling a few puts and the stock you pick goes up. So you make a nice profit and decide that you will sell a few more puts the next time so you can make more money. If that works, you will naturally add more puts the following time. After a while, you will be writing so many puts that when the market moves against you, as it inevitably will eventually, you could easily lose all your previous profits plus much more.

The second piece of advice is probably more practical and that is, to avoid buying puts or calls. In theory they should be a great speculation. You are risking a relatively small amount of money with the potential to make a large amount. The only factor left out of this is what is the probability of making that money. To illustrate this with an exaggerated example, one could also say that a lottery ticket is a great investment because you only have to spend a very small amount of money and you could make millions. But we know that the chance of this happening is almost infinitesimal.

While the chances of making money from buying a put or call are much better, it has been my experience from twenty-three years as a professional in the options business that options buyers almost always lose their money in the end, which is the main reason I choose to focus on selling options!

Vision Tell us about your trading system.

Ansbacher My trading system is to sell puts and/or calls on the Standard & Poor’s 500 Stock Index in the futures market. I sell only deep out-of-the-money puts and/or calls, and I generally sell those with the shortest or next to shortest expirations. An integral part of my trading strategy is that I then enter a stop loss order to buy the option back in if it moves more than a certain amount against me. The use of stop-loss orders does not guarantee that your loss will be limited to the intended amount. Certain market conditions may make it impossible to execute such orders. The most difficult part of the strategy is the decision of whether to sell puts, or calls, or any combination of the two. In making this decision, I am aided by The Ansbacher Index. I also take into consideration market momentum and utilize my two decades-plus experience trading options.

Ansbacher In one word, diversification. I believe many investors are dangerously overexposed to the stock market. They lack an investment that can capitalize on the market’s volatility and help protect their portfolios from a sharp drop, correction, or even worse, the bubble bursting in the market. Individuals investing with AIM can take comfort knowing my trading blends quite nicely in providing investors profound diversification in their stock portfolios. I can potentially capitalize virtually on every market move, up, down, or even sideways.

I believe my maturity and participation in virtually all market conditions over the past 30 years provides me a distinct advantage over many other traders who lack, or are not old enough, to have my experience in bear markets.

Finally, the most important reason. First, let me state, in any non-guaranteed managed investment, whether in stocks or managed futures, there can never be any assurances concerning performance. There are probabilities. The probabilities of success or failure in practically any non-guaranteed managed investment, I believe, should be based primarily on the manager’s credentials, experience, and past performance. I believe it can be a valuable guide in gauging the probability of future performance.

Over the past 30 years, I earned my stripes, so to speak. I wrote the first book ever on exchange traded options and have devoted the better part of 25 years to becoming one of the leading authorities on S&P 500 Options.

I have invented an Index which helps forecast market direction and is followed worldwide.

My opinions on the market are regarded highly enough that I am a frequent guest on Bloomberg TV and other financial shows as well as being quoted in financial publications.

Most importantly, my actions have spoken louder than my words. Based on prudent money management and performance, I have achieved one of the best performance records among money managers today.

I believe if an investor takes into consideration these factors, he will have about as high a probability of success with me as one can reasonably ask for.