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

I've seen this for 23 years and have followed these guys to see how long they could hold on. We're naked natural gas and crude oil without any problems and have never had an account blown up no matter what we traded through. They drifted from the most basic money management rules...it's that simple! Fear & Greed - they get you every time...
 
I think you nailed it. As a periodic options "buyer" (just puts and calls), my rationale for buying options is because I can take a position and know my maximum risk at entry. Options selling just seems like you're playing with fire. That being said, a lot of lives just got turned upside down over this debacle.

GRULSTMRNN said:
Simple answer: in my 20 years as professional in markets have I not seen or heard of a single options seller who survived in the long term. I have heard of hundreds and been trading alongside dozens of frenchmen who consistently sold options outright, many of whom hedged the wings, others did not, many made money over long periods of time. But when the unavoidable black swan hit they all faltered, left or got fired and knocked on another door and got rehired. Same game all over.
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helpme_please said:
J

That’s great because you can sell puts all the way up and you’re making money and that can be a great strategy for three, six, twelve months
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I recommend you do if you want to learn about this. FUDOM is really the method and philosophy we recommend to sell options. What it is, is selling fundamental deep out-of-the-money options. So you’re basing your decisions on long-term fundamentals in commodities and then you’re just selling deep, deep out-of-the-money options away from those fundamentals – in the opposite direction.
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It is their basic strategy. Sell deep ITM 3,6,12 months out.

I just wanted to take look how much would have been the loss if one sold 6 months out 2 Standard deviation away.

Here is the Dec NG18 chart
Snap1.png


Sold calls on Jun29th 2 standard deviation away. Imp vol was around 25% for Dec18 contract.

Snap2.png


Bid/ask for $4 contract was around 0.014/0.016. Sold at mid at 0.015

They talked about risk management, but based on the closure of the fund they forgot about it.

On Nov14 same calls are valued around $1. More than 66 times their original premium

Snap6.png
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GRULSTMRNN said:
Simple answer: in my 20 years as professional in markets have I not seen or heard of a single options seller who survived in the long term.
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Finally I got the answer, even though I have suspected this all along. Lots of fancy theories as to risk management, but at the end you are net short gamma and praying for mean revision to save you. OP, thanks for the excellent thread.
 
Whether you are a hedge fund or retail trader, risk management must be part of your trading plan or you will blow up your account! The only question is when? Greed probably, over ruled risk management because they figured, why spend monies to protect your position when we can put those monies in our pockets instead? Selling naked call options, your risk is unlimited to the upside! Remember that if you remember one thing.
 
qlai said:
Are you saying you are often net short gamma, or just not religious?
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No, I don't do options... so I'm foggy about what "net short gamma" actually means.

What is not in my bag of tricks... is "allowing any position to run against me with the hope of it reverting to the mean to save my bacon". Many times it does. Sometimes not... and can have catastrophic effect.

Those Shortsellers.com guys could have covered their put positions or bought calls to offset and limit their losses... but they wouldn't "take their lumps"... didn't want to book that loss. And look what it cost them! Rookie mistake. (How does one make such a rookie mistake after having been in the markets for 30 years?)
 
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i don't really think risk management applies to naked short options. Yes you can have some form of risk mgt by capital allocation but ...
 
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