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

[cambridgesoho]

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?)

Did they have time to cover? the price shot up in the matter of days or hours?

 

[sle]

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.

Not my preferred strategy, but that's not really true. Institutional finance (especially sell-side) is not a good indicator since most of these guys would get their risk cut at the bottom of the drawdown and could never recover. There are several options sellers who've been around for years and years, like Max Ansbacher.

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.

The only risk management that you can apply here is conservative sizing. At the extreme, if you are selling puts that are cash-secured, you'd never blow up but your return on capital is not going to be stellar.

 

[GRULSTMRNN]

Years and years or decades and decades? Hedged or unhedged? Covered or uncovered? I know you know that answers to those questions make all the difference.

By the way Ansbacher does not just sell options they are long gamma and Vega as well.

Not my preferred strategy, but that's not really true. Institutional finance (especially sell-side) is not a good indicator since most of these guys would get their risk cut at the bottom of the drawdown and could never recover. There are several options sellers who've been around for years and years, like Max Ansbacher.


The only risk management that you can apply here is conservative sizing. At the extreme, if you are selling puts that are cash-secured, you'd never blow up but your return on capital is not going to be stellar.

 

[mushinseeker]

When shit hits the fan in those moments a couple of things happen... 1) you start rationalizing that "this is the point of max loss " so wait another hour...and another hour... 2) the spreads blow up for there is a proverbial run in the bank and bid/offers get to a point where people who need to lift the ask to button up the risk suddenly become walmart shoppers and do'nt lift the ask because it is 20 cents over fair value. 3) your clearing house does it for you by hitting bids and offers indiscriminately so now your 25% loss suddenly because 40% loss bec everyones adjusting thier skew.

 

[qlai]

How does one make such a rookie mistake after having been in the markets for 30 years?

I assume by managing OPM.

 

[sle]

Years and years or decades and decades? Hedged or unhedged? Covered or uncovered? I know you know that answers to those questions make all the difference.

Decades. For example, Max Ansbacher has been around for 40 years or something like that. He sells equity vol in various shapes and forms, mostly vanilla OTM puts. Used to veer into light exotics (like he used to sell WoPs when correlations where attractive) too. I think he buys back the wings, but I am not sure.

Couple people I know that sell vol for a living all size positions very conservatively, have a reasonably good model of when the wings are rich and try to cover the extreme scenarios, sometimes by proxy. Indeed, the ones that got greedy, blew up at one point or another.

 

[sle]

I assume by managing OPM.

Not really. I know a guy who had 30% of his net worth in XIV in Feb. He is a super-star macro trader, yet made that type of rookie mistake.

 

[Scataphagos]

Did they have time to cover? the price shot up in the matter of days or hours?

Looks like the rally lasted 8 days. About half of that on the peak price day (8th)... don't know about intraday move on the last day.

 

[GRULSTMRNN]

Agree with those more qualified statements. Selling premium with hedges in the wings is a very different game in town than selling premium uncovered.

Decades. For example, Max Ansbacher has been around for 40 years or something like that. He sells equity vol in various shapes and forms, mostly vanilla OTM puts. Used to veer into light exotics (like he used to sell WoPs when correlations where attractive) too. I think he buys back the wings, but I am not sure.

Couple people I know that sell vol for a living all size positions very conservatively, have a reasonably good model of when the wings are rich and try to cover the extreme scenarios, sometimes by proxy. Indeed, the ones that got greedy, blew up at one point or another.

 

[smallfil]

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 ...

Risk management applies to naked calls as well! What you do is buy a higher strike OTM call in adverse cases like this. That way, you limit your losses. I say limit because you will still suffer huge losses but, not blow up your account. I lost thousands trying to sell calls but, I had the sense to protect myself. I did not blow up my account. Now, I just buy calls and puts where the worst case scenario is the lost of the total premiums paid and not a penny more! Upside is multiples of the premium if the trade works.