What risk management mistake did optionsellers.com fund manager do to blow up his fund and clients?

What risk management mistake did optionsellers.com fund manager do to blow up his fund and clients?

Apparently they completely neglected having any sort of risk mgmt strategy. The move in natural gas by historical measures is nothing unusual at all, the volatility had contracted the last 4 years, it was long overdue for a big breakout.

The speculators will blame their losses on the hedge fund, the hedge fund blames the market (rouge wave), & the lawyers will blame the clearing firm for even allowing wild speculation to begin with.

Nothing new here, just weak hands being purged off the table.




 
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The guy looks and sounds like a preacher who is remorseful to his congregation/flock/family for being caught out in an immoral sin. White shirt, suit and tie, tears....
He'll be asking for forgiveness, give him a little while and his self guilt will resolve and he'll start afresh with a new lease of life and not a care in the world, prolly shift town first then find a new family to fleece.
(White shirt always promotes the image of honesty)
 
Thank you for all the comments and guidance.

Good lesson for me: I should never over leverage. He and Karen the Supertrader both could survive if not for margin. Of course, then the returns would be meager.
 
I never take a size that I cannot close within seconds. In the ES that's never a problem, even if you trade a little bit of size.

It looks to me that he was not able/waited too long to cover his position fast enough. That was a bigger problem I think then the leverage.
 
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ironchef said:
Thank you for all the comments and guidance.

Good lesson for me: I should never over leverage. He and Karen the Supertrader both could survive if not for margin. Of course, then the returns would be meager.
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That seems lesson #1 for me as well ironchef! But there is something that I just can't get to add up.

I think it was earlier in this thread I asked what if they scaled down the operations by 250% to angle for a 10% annual return rather than a 25% return. Apparently he would have still blown up his account aiming for returns that are decent but nothing spectacular.

So that would lead one to think selling calls (I think what they were doing) is a bad strategy. But months ago or longer I made a thread asking about the returns buying puts/calls versus selling puts calls.

I believe the best overall was selling puts. selling calls was not far behind. ahead of buying both I believe.

but if you cant average 10% a year on average selling calls without blowing out your account every few years on what seemed like a not all that extraordinary move per what I see people saying, selling calls would seem horrible. But then there is that study that shows it's better selling them then buying them. I dunno. maybe option sellers.com just employed an exceptionally stupid strategy as to what particular calls they chose to sell. *shrug*
 
Saltynuts said:
but if you cant average 10% a year on average selling calls without blowing out your account every few years on what seemed like a not all that extraordinary move per what I see people saying, selling calls would seem horrible. But then there is that study that shows it's better selling them then buying them. I dunno. maybe option sellers.com just employed an exceptionally stupid strategy as to what particular calls they chose to sell. *shrug*
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Why would buyers of options willing to hand you an easy 10% a year return?

As someone else here said, the only way to get a decent return selling DOTM options is with leverage. However, quite often, DOTM on margins doesn't have to get ATM or ITM to trigger a huge loss and forced liquidation.
 
JSOP said:
Yes for carelessness and imprudence, failing their fiduciary of duty and exercising their duty of care to their clients. The hedge fund manager is not liable for any losses only after he's exercised all possible caution and did everything he could to mitigate losses. If it is discovered that there was something that he could've done to avoid or at least mitigated the losses and he didn't, he could still be found liable.
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But what if you put in the contract, I might recklessly gamble your account to negative balances. Is it possible to put enough stuff where he could not have been sued?
 
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