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

[JSOP]

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?

No if you manage other people's money, you owe a duty of care to your clients to manage their money most prudently as possible and earn a decent return for their money. You have a first and foremost fiduciary duty to your clients. The disclaimers is just there to advise clients of some of the possible outcomes that may happen to their accounts; it is not an excuse or a green light for the money manager to be derelict in his/her duty. It's not like "oh well the clients have been told now that their money can go to the dogs so I can just do whatever to their money". No amount of disclaimers could ever absolve the people that you pay money to from their negligence, even though on every single entry ticket to the movie theatre, it's printed "Enter at your own risk". But if you slip and fall on some icy water that some brats spilled on the floor and get head injury that resulted in major brain damage because their staff failed to clean up properly or didn't clean the floors at all, you can still sue the theatre and most likely you will win. This is what I learned in my Corporate Law class.

 

[Overnight]

...This is what I learned in my Corporate Law class.

You are pretty much correct sir. Pays to be a victim these days on the slip and fall.

 

[JSOP]

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*

There is a place and time for everything. And that rings true for selling options as well including selling calls. It's not the selling of calls and puts itself that are bad per se; it's HOW this guy sold calls and puts that was the problem. In the investment world, anything you do including option selling can be a lucrative way to earn decent stream of income but ONLY when it's done properly and with very strict risk and money management controls which he failed to put in place. Without proper risk and money-management controls, even bonds can be risky.

 

[JSOP]

You are pretty much correct sir. Pays to be a victim these days on the slip and fall.

Not to be a victim on purpose but just to illustrate to you that those disclaimers do not absolve them from doing what they are supposed to do to provide a basic standard of care.

 

[ironchef]

In the investment world, anything you do including option selling can be a lucrative way to earn decent stream of income but ONLY when it's done properly and with very strict risk and money management controls which he failed to put in place. Without proper risk and money-management controls, even bonds can be risky.

Can you explain what proper risk and money management control entail so we can make a decent stream of income selling DOTM options?

Thanks.

 

[JSOP]

Can you explain what proper risk and money management control entail so we can make a decent stream of income selling DOTM options?

Thanks.

-No over-leveraging
-Stop-loss when necessary
-Hedge

These are advised to you on every single article, website about option selling, obviously not on James Cordier's "Complete Guide to Option Selling" I guess. LOL. I listed the most common one below.

https://www.investopedia.com/articles/optioninvestor/09/selling-options.asp

 

[ironchef]

-No over-leveraging
-Stop-loss when necessary
-Hedge

These are advised to you on every single article, website about option selling, obviously not on James Cordier's "Complete Guide to Option Selling" I guess. LOL. I listed the most common one below.

https://www.investopedia.com/articles/optioninvestor/09/selling-options.asp

But then you won't be making 25% or even 10% selling DITM options.

 

[sle]

But then you won't be making 25% or even 10% selling DITM options.

In this business, you can either eat well or sleep well. You pick

 

[ironchef]

In this business, you can either eat well or sleep well. You pick

Hard to sleep well going to bed hungry.

 

[ironchef]

-No over-leveraging
-Stop-loss when necessary
-Hedge

These are advised to you on every single article, website about option selling, obviously not on James Cordier's "Complete Guide to Option Selling" I guess. LOL. I listed the most common one below.

https://www.investopedia.com/articles/optioninvestor/09/selling-options.asp

JSOP,

A DITM option with a 90% probability of expires worthless typically has a low single digit return if expires worthless, so leverage is necessary.

What if I only do 2 and 3? Have you folks done any analysis on whether stop-loss and hedge are sufficient to ensure no disasters + a decent return, like ~10%? If so, what is the risk-reward curve looks like from leverage?

Maybe I should post this same question to Buy1Sell2?