What risk management mistake did optionsellers.com fund manager do to blow up his fund and clients?
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Fair I guess we miscommunicated and hence agree on the issues. That there are people who sell wings at pennies is apparent to me. I questioned the rational especially of someone with a fiduciary duty to investors.
Are we? Cause I've been talking about short wings pretty much from the first time I posted in this threadIn response to @MrMuppet, I am saying that in my recollection, positions that blow up funds are naked short wings, not short gamma. Maybe we are having a serious communication failure and in reality we are mostly in agreement?
That's a very different trade. It is scary and has a potential to get one fired, but at the bird-eye level you usually you have a fair idea what the risk is in the book and you can cover it.
I've never worked for one (nor would I want to), but I certainly have seen plenty of them - the guys in the subject, the LJM guys et al. It seems like it's a strategy that attracts a lot of investors when the going is good.
It would've still blown up but maybe by less amount. He was selling options with strikes that are 50% to 100% OTM. With strikes that far OTM, the premiums wouldn't be great if it's adequately compensating for the volatility so he wouldn't have been able to even offer 10% return without significant leveraging. And since he's selling naked, it would've still blown up. Unless the premiums are high enough that he wouldn't need much leveraging to achieve the even 10% return then that means those strike would not be OTM enough for the implied volatility and he would've blown up sooner. It's just that without leveraging, the clients won't be owing any or much debit balance.
Option selling is harder and less rewarding than people think. Its stability of income can be deceiving but what you are doing is giving up the potential of investing with the market for the compensation of betting against it with the possibility still of that compensation not being enough.
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These guys woes started earlier this year when they were caught short gold puts, that was followed by getting clipped on CL calls and then followed by the downdraft in CL which squeezed them hard on their short put positions, putting them under considerable pressure. They also rolled out their initial short NG calls into more of and higher strikes.
The problem is when things get that wild, all sense of an orderly market goes, the spreads on the options go to the extreme and the offers just step away to take full advantage.
The problem is when things get that wild, all sense of an orderly market goes, the spreads on the options go to the extreme and the offers just step away to take full advantage.
Thing is that being short NatGas vol over the last month has been a very good trade for most experienced energy traders
The price risk looked very asymmetric compared to the way the options were trading
With the December contract trading in the $3.00 - $3.25 range and the storage situation there was relatively low risk in shorting the $2.50 puts as even if the price got there it was unlikely to be a quick move
Will be interesting to see what Call strikes these guys were shorting and what their strategy was - if there even was one other than collecting maximum premium
The price risk looked very asymmetric compared to the way the options were trading
With the December contract trading in the $3.00 - $3.25 range and the storage situation there was relatively low risk in shorting the $2.50 puts as even if the price got there it was unlikely to be a quick move
Will be interesting to see what Call strikes these guys were shorting and what their strategy was - if there even was one other than collecting maximum premium
Reeling like a drunken sailor with this chasing one loss after another. Sounds to me like they lost the ability to read the market, which makes me further wonder have they had some major staff turnover and lost the skill which was guiding them previously. To me this has the halmarks of a noob who has taken over the helm and on the first bout of turbulence has lost control, panicked and overturned the vessel.
A skilled veteran would not behave in this manner unless on drugs.
Holy fuck I just understood what happened.
Guy sold naked deep OTM with no hedge assuming the strikes would never hit. Not enough premiums to hit target return, so he leverages. Holy fuck. A litlte paranoia goes a long way.
FUDOM=FUBAR
"Number two, you employ the FUDOM Method. For those of you who aren’t familiar with the FUDOM Method I suggest you go back to the video lessons portion of our website where we cover FUDOM, the method we recommend. It’s also in our materials if you requested any of our free booklets on-line, which 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. This isn’t a seminar on FUDOM but, it’s one of the ways you do avoid the big hit. You sell deep out, even if you get spikes in the market, your options aren’t going in the money. That’s why you use FUDOM."
"Number two, you employ the FUDOM Method. For those of you who aren’t familiar with the FUDOM Method I suggest you go back to the video lessons portion of our website where we cover FUDOM, the method we recommend. It’s also in our materials if you requested any of our free booklets on-line, which 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. This isn’t a seminar on FUDOM but, it’s one of the ways you do avoid the big hit. You sell deep out, even if you get spikes in the market, your options aren’t going in the money. That’s why you use FUDOM."
Well apparently he did hedge with a 12:1 ratio so basically he was buying 1 long call to every 12 shorts thinking that would be enough.
Yeah not only he was overleveraging on naked shorts, but he also didn't have the discipline and the guts to cut losses by exiting the positions when he saw the market was going against him. I am sure he never planned his trades, never analyzed them, never set a stop-loss. When option trading, what I find is you REALLY REALLY have to plan and analyze your trades. You have to look at your position from single angle, run it through all possible scenarios, not just the profitable ones and have a plan for every single one of these scenarios, what happens when this happens, what do I do when that happens and etc. And then when these scenarios happen, be prepared to execute the plan. I bet you he's never done that. And that's how he and his clients ended up how they are now. If he had done the planning, the scenario analysis, and cut losses when required, he could've still salvaged some money. The loss would've still been devastating but it wouldn't be a full blown-up of accounts and even owing more money to the broker. These clients didn't just lose everything; they still owe money to the broker; all of their accounts are in debit balance right now.
I hope FC Stone is more understanding and more lenient in collecting the owed debit balance from these clients.
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But they are the ones that will take the hit in that case, right? That would be a bad precedent. But I do think they should have had more oversight and thus are partially responsible, imho. Let's see.