Fund loses 600mil (15%) doing spreads

RedDuke · Feb 17, 2017

https://secure.marketwatch.com/story/funds-600-million-lost-week-captivates-traders-2017-02-16

This is a nail in a coffin for all those who think that spreads are safer than naked options.

It is all about leverage and risk management.

samuel11 · Feb 17, 2017

RedDuke said:
spreads are safer than naked options.

A 1*4 ratio spread for example leaves you naked 3 options... That is what this fund did.

http://www.futuresmag.com/2012/08/31/walczak-finds-safe-harbor-options

"The strategy uses a wide variety of ratio spreads, butterflies and offset butterflies. “It is basically 1 x 2s, 1 x 3s, 1 x 2 x 1s.."

RedDuke · Feb 17, 2017

Fuels the broker pockets for sure. I ran a back test on spreads, and what I found is that if the strikes are too close, there is not much money that can be made after all fees, and the moment you widen them, the spread does not help much when markets move strongly in one direction, similar to naked options.

Maverick74 · Feb 17, 2017

RedDuke said:
Fuels the broker pockets for sure. I ran a back test on spreads, and what I found is that if the strikes are too close, there is not much money that can be made after all fees, and the moment you widen them, the spread does not help much when markets move strongly in one direction, similar to naked options.

That's not what happened. Ratio spreads need to be used in "high vol" not low vol. The higher the vol and the steeper the skew, the wider your strikes. This idiot did the opposite. He was using ratio spreads in a low vol tape just because he was scared of the market going down. Has nothing to do with the efficacy of the trade structure.

R1234 · Feb 17, 2017

I will never cease to be amazed at how much money flows into such garbage strategies

lawrence-lugar · Feb 17, 2017

R1234 said:
I will never cease to be amazed at how much money flows into such garbage strategies

Every...type of strategy/trade is essentially "garbage" ...the only difference is that if they happen to be Winning strategies, or trades,...then they are now called Genius trades, or a genius trader

sle · Feb 17, 2017

Mav is right, it sounds like he did something inconsistent. A ratio spread is a bet that realized terminal distribution is going to be narrower then implied. You start losing money if the asset drifts past the break even level - if you misjudged the extent of that distribution you are fucked

ironchef · Feb 17, 2017

sle said:
Mav is right, it sounds like he did something inconsistent. A ratio spread is a bet that realized terminal distribution is going to be narrower then implied. You start losing money if the asset drifts past the break even level - if you misjudged the extent of that distribution you are fucked

What you folks said seemed so fundamental but after the fact analysis and making decisions in real time are two different things. I am sure their PhD finance analysts are not dumb, so why the trades, what were the rationales, probability, risk-reward? Maybe by understand their thought processes I can learn something useful.

Any comments are welcome. Best to you.

Martinghoul · Feb 17, 2017

ironchef said:
What you folks said seemed so fundamental but after the fact analysis and making decisions in real time are two different things. I am sure their PhD finance analysts are not dumb, so why the trades, what were the rationales, probability, risk-reward? Maybe by understand their thought processes I can learn something useful.

Any comments are welcome. Best to you.

While it's impossible to know what these guys were thinking, the theory here is actually quite simple...

There are all sorts of reasons to utilize these types of strategies, some kinda valid and some monumentally stupid. It appears that these guys were motivated by the latter. I'd be happy to expand further, if you like.

Sig · Feb 17, 2017

RedDuke said:
https://secure.marketwatch.com/story/funds-600-million-lost-week-captivates-traders-2017-02-16

This is a nail in a coffin for all those who think that spreads are safer than naked options.

It is all about leverage and risk management.

It isn't a nail in the coffin of anything! I can point to a fund that lost money at some point using any strategy that you can come up with. That's hardly a "nail in the coffin" of that entire strategy. Basic logic my friend, basic logic!