Why do options writer have better chance of earning

[bycfly 0]

Everyone say option writer have the edge because most options expire worthless. I dont understand why. It seems to me very likely if I buy a call, say, AMZN, a month from now at strike price of $1800 and it's currently $1750. There must be one day it gets above $1800 and I can just sell my options. Or is it people don't sell options on time even when it's in the money and are too greedy and end up expiring because its out of the money at expiration

[Yowster 9,174]

1 hour ago, bycfly said:

Everyone say option writer have the edge because most options expire worthless. I dont understand why. It seems to me very likely if I buy a call, say, AMZN, a month from now at strike price of $1800 and it's currently $1750. There must be one day it gets above $1800 and I can just sell my options. Or is it people don't sell options on time even when it's in the money and are too greedy and end up expiring because its out of the money at expiration

Don't forget negative theta.   For example, with AMZN the ATM October monthly call is over $50 cheaper than the November monthly call - that would have to be made up via stock price movement.    IV can also effect options price, like if you buy a call now with IV elevated it can lose a lot of its value when/if IV drops.  So, if AAPL moves from 1750 to 1800 there is no guarantee you'll make money especially if that move takes place over a longer period of time.    Also, always think of things in percentage terms - APPL moving $50 from 1750 to 1800 is the same thing as a 17.50 stock move to 18.00 - its a 2.8% increase in both cases.

[Lazlo 111]

@bycfly The reason option sellers make money over an extended period of time is that implied volatility exceeds historical volatility. Means the markets anticipate a higher move than it will actually occur. This alone - but not only - gives option sellers an edge in the market. I'd recommend you watch the video 'What's Our "Edge" Trading Options?' from optionalpha. At around minute 30, he shows the comparison between implied and historical volatility. Watch the complete video for a complete picture. 

Edited October 12, 2018 by Lazlo

[RapperT 336]

Option writing works great until doesn’t.  Ask guys like Neiderhoffer

[Kim 7,943]

Things are not black and white. 

As an option buyer, you have to be right in 3 things: direction of the move, size of the move and timing. AMZN can move to 800, but if it doesn't move fast enough, you might still lose money. It might move even to 900, but it might happen after your options expire. So you were right on direction and size of the move, but not timing. Options sellers have more margin of safety.

Generally speaking, options buyers win less times, but their winners might be much bigger. Options sellers have higher winning ratio, but the profit potential is limited. And the biggest problem with options selling is that when you lose you can lose big. One big loss can erase months of gains.

It's all about using the right strategy on the right underlying under right conditions.

[RapperT 336]

2 hours ago, Kim said:

. Options sellers have higher winning ratio, but the profit potential is limited.

It's all about using the right strategy on the right underlying under right conditions.

and the losses can be massive when they occur.  It;s not to say it never makes sense, but most of the guys i come across who exclusively sell options have very poor risk mgmt in place

Edited October 12, 2018 by RapperT

[kirkr1517 108]

1 minute ago, RapperT said:

and the losses can be massive when they occur.  It;s not to say it never makes sense, but most of the guys i come across who exclusively sell options have very poor risk mgmt in place

I agree, the losses will be much larger on selling premium.  My biggest problem was the mental component.  For example, when selling an iron condor, you're almost always in the hole right away, since the theta gains are slow, but any movement in the underlying creates gamma losses.  I would constantly cut my losses, but wasn't making it up in gains.  So for me, selling premium was just too difficult because of those fears.

[cuegis 683]

One of the most misleading statements about options that has been perpetuated forever is " 90+% of all options (or whatever high number is used) expire worthless"

This is like saying "100% of all humans die".

What the statement fails to point out is what happened during the lifetime of the option.

An option may have been "born", or "come on the board" at $3.00.

Then during it's lifetime, it might have "travelled" to $12.00, then $5.00, then .50, $27.00, $.10, $5.50...and then expire worthless.

You get the point.

All humans die but, what is important is what happened during their lifetime!

[RapperT 336]

On 10/12/2018 at 4:58 AM, RapperT said:

Option writing works great until doesn’t.  Ask guys like Neiderhoffer

Aaaaaand other options selling fund goes bust (optionsellers.com).  Lost 100% of investor capital... video announcement almost feels like a parody 

 

@Kim

[RapperT 336]

One of reasons steadoptions is so successful is not so much that our strategies are resilient to volatility... they actually BENEFIT from vol (there is a big difference).  nassim Taleb would refer to this as being “anti fragile.”

short vol can work, especially if implemented wisely like we do here from time to time.  Short vol strategies in general though are fragile  in that they are extremely susceptible to unexpected volatility surges or black swan type events.   SO foundation is based on trades that are the paradigm of anti fragility 

Edited November 17, 2018 by RapperT

[craigsmith 357]

18 minutes ago, RapperT said:

Aaaaaand other options selling fund goes bust (optionsellers.com).  Lost 100% of investor capital... video announcement almost feels like a parody 

 

@Kim

 

Some additional info....https://www.johnschapman.com/investment-fraud/optionsellers-investment-loss-recovery/

 

On November 15, 2018, OptionSellers.com notified its investors in an email entitled “Catastrophic Loss Event” that it not only lost all their money, but that they would also owe money to Intl FC Stone for margin calls. According to OptionSellers.com, they lost a substantial portion of their investors’ assets due to a short call position in crude oil that, according to Optionsellers.com “was so fast and intense that it overwhelmed all risk measures in place.” It then informed investors that they have a debit balance in their accounts which they need to bring back to zero by paying INTL FC Stone the difference. So, in addition to trying to process the news all their money is gone, they also have INTL FC Stone breathing down their necks demanding they pay the money they owe for its margin calls.

Edited November 17, 2018 by craigsmith

[cuegis 683]

20 minutes ago, RapperT said:

Aaaaaand other options selling fund goes bust (optionsellers.com).  Lost 100% of investor capital... video announcement almost feels like a parody 

 

@Kim

Wow..that is very interesting....

They send me all of their mailings and emails.

So I watched some of them.

What they say "in theory" has truth to it, but they have created a company that only accepts a minimum account size of $1 million, and you have to produce financial statements to show you have a certain net worth.

You also must be an " accredited investor".

I once did some searching about them and found that they had been down this road in earlier incarnations, where they lost 90% of customer's money and were sued.

 

So, in their more recent business model of "Option Sellers" they probably were given some heavy duty legal guidance to protect themselves from/when this inevitably happens again.

 

I trade a lot of the things that they do...coffee, sugar, crude, soybeans etc...and a lot lately.

I actually started with a seat on the floor of the coffee, sugar, and cocoa exchange, and also NYMEX which is crude oil,and energy products.

So I know something about all of this going back to 1980 when I started there.

 

I was just watching their most current , "urgent" "newsbreaking" warning of what their next plan is, and I just could not believe it.

 

They were talking about the crop season, which takes place for coffee in Brazil during Oct-Nov, where coffee prices spike up each year, and that was the greatest opportunity to sell OTM coffee calls, on the rally.

 

But, unlike stocks, there are real supply/demand issues going on with these "crop" type commodities, and they are not 2 day events, like a VIX spike.

 

These bull runs can become VERY extreme and go on for months.

 

Just look of at some of the charts and you will see how you would be jumping in front of a speeding train.

 

I assume that's what caused this, latest downfall,.

I knew it was only a matter of time when listening to their approach.

 

Also, I was offended, as a trader, at their arrogance to present themselves as "high end" only for "high net worth investors" with a minimum beginning account of $1 million.

 

So that what? they could charge $50 per option, for their great expertise, and all they do is just sell some OTM calls on a rally?

 

It was one of the biggest, most inevitable, blow ups just waiting to happen.

Out of most of the hucksters out there, these 2 guys really deserved this .

It really makes me angry because I have always associated with with very honest people who truly explain the real risks involved, and how things work.

And, most of all, provide some sort of track record before having the nerve to "require" $ 1 million!

 

 

[cuegis 683]

38 minutes ago, craigsmith said:

 

Some additional info....https://www.johnschapman.com/investment-fraud/optionsellers-investment-loss-recovery/

 

On November 15, 2018, OptionSellers.com notified its investors in an email entitled “Catastrophic Loss Event” that it not only lost all their money, but that they would also owe money to Intl FC Stone for margin calls. According to OptionSellers.com, they lost a substantial portion of their investors’ assets due to a short call position in crude oil that, according to Optionsellers.com “was so fast and intense that it overwhelmed all risk measures in place.” It then informed investors that they have a debit balance in their accounts which they need to bring back to zero by paying INTL FC Stone the difference. So, in addition to trying to process the news all their money is gone, they also have INTL FC Stone breathing down their necks demanding they pay the money they owe for its margin calls.

This is SO outrageous , on so many different levels.

First of all, the one market in the world where you have the greatest potential ability to protect yourself against any sudden , adverse movements, is Crude Oil as it is open 23 hours a day ...options too. Plus it is THE most liquid market there is.

Even 4 leg spreads are .01 cent bid/ask, and you can buy or sell 5000 spreads and the market won't even feel it.

On top of that, the period leading up Nov 15th has seen Crude down EVERY single day for something like 27 consecutive days, with one of the largest price drops in crude history.

So, how in the heck can you lose money , during this historical period, on "SHORT CALLS?'"

Everything about this makes the term "Black Swan" seem small!

Oh, and to require a minimum opening account balance of $1 million for "High Net Worth Investors", you would assume that these would be THE most experienced traders that ever walked the earth.

 

Everyone loses money in this business, and you can be good or bad at directional choices but, no matter who you are...if you take that kind of money from "investors" you damn well better be, at the very minimum, 100% superb in your risk management, which anyone can do through some degree of sensible allocation.

Anyone who knows even the smallest amount, and be able to raise millions, from so many investors, should at the very least , be able to allocate well enough to not lose 100%++++ of an account's value.

This truly is a case where a monkey can do better!

Edited November 17, 2018 by cuegis

[RapperT 336]

Also, we limit our losses in most of our short vol strategies by buying the tails.  This is very different from simply writing puts etc. much less fragile and limits downside 

Edited November 17, 2018 by RapperT

[cuegis 683]

I just went back through my email inbox, which typically has one "Option Sellers" email per week, with a youtube type video of the 2 of them making a presentation about some current market situation, and the best way that "they" would take advantage of it.

 

They obviously closed down, or locked out access to every video they ever made, just over the past few days, as I cannot open any of them.

It just shows a screen with their company's name.

They packed up and took off out of "dodge".

 

I wouldn't even try to attempt to make any comparisons between SO, and how they do things, with this group.

By doing so you are actually taking them seriously, and they just do not deserve even that much respect.

 

There is nothing to compare.

There is no "strategy", and definitely/obviously no "money management" of any kind.

 

An account is opened, and they just sell strangles as far away as possible, with no further plan involved.

 

They can get away with this for awhile much, much better than if it were stocks and stock options because the SPAN margin system is SO loose, and liberal, and as a rule, commodity options offer many times more premium than stock options...not even taking any look at IV, which they obviously do not.

 

You can sell 10 delta strangles, going out 120 days, and have very little margin and collect a LOT of premium.

So, the landscape is just perfect for them to get away with this for awhile before the inevitable.

Edited November 17, 2018 by cuegis

[Yowster 9,174]

11 minutes ago, RapperT said:

Also, we limit our losses in most of our short vol strategies by buying the tails.  This is very different from simply writing puts etc. much less fragile and limits downside 

Agreed, also to add that market conditions during trade entry are very important to limit risk..

• We've been in a low vol environment for the vast majority of the time over the last few years, and our hedged straddles and calendars are vega positive trades.   By entering when the vol is low, the risk of significant decline due to further vol drop is less.
• Now that we've seen some extended periods of elevated market vol, we have to look at vega negative trades like the SPX butterflies and the current IBM BWB trade - these trades will benefit from IV decline but by using OTM puts they can still make some gains on downward price movement if vol stays elevated.   We can still do a couple of straddles and calendars that can work if vol stays elevated or increases - but they are riskier to open when vol is elevated, so we don't have a many of them open.

[cuegis 683]

I don't know how they got past the censors but they have a history of Seeking Alpha presentations.

This is the most recent from Nov 1st.

Look what happens when you try to view it.....

 

https://seekingalpha.com/article/4216814-option-selling-opportunities-good-scary

[apsoccermd 27]

Apparently, dude also has some options books published.. 

 

https://www.amazon.com/Complete-Guide-Option-Selling-Options/dp/0071837620/ref=sr_1_1?s=books&ie=UTF8&qid=1542471354&sr=1-1

[RapperT 336]

On 10/12/2018 at 7:32 AM, Kim said:

Things are not black and white. 

. Options sellers have higher winning ratio, but the profit potential is limited.

It's all about using the right strategy on the right underlying under right conditions.

 

On 10/12/2018 at 9:50 AM, RapperT said:

and the losses can be massive when they occur.  It;s not to say it never makes sense, but most of the guys i come across who exclusively sell options have very poor risk mgmt in place

What proponents of writing naked options never seem to consider is the issue of magnitude.  Probability of a win is only part of the story.  Luckily people never seem to learn from history so we will continue to have counter parties to all our long vol plays

[cuegis 683]

4 minutes ago, Yowster said:

Agreed, also to add that market conditions during trade entry are very important to limit risk..

• We've been in a low vol environment for the vast majority of the time over the last few years, and our hedged straddles and calendars are vega positive trades.   By entering when the vol is low, the risk of significant decline due to further vol drop is less.
• Now that we've seen some extended periods of elevated market vol, we have to look at vega negative trades like the SPX butterflies and the current IBM BWB trade - these trades will benefit from IV decline but by using OTM puts they can still make some gains on downward price movement if vol stays elevated.   We can still do a couple of straddles and calendars that can work if vol stays elevated or increases - but they are riskier to open when vol is elevated, so we don't have a many of them open.

Option Sellers ONLY deal ("dealt") in commodity options.

So the IV history you are referring to has no relationship to the arena that they trade in.

Probably the opposite is true, plus there is such a wide variety of commodities which are all doing different things at different times.

Over the years you are talking about , many commodities have been in an elevated IV environment.

But, even during "normal" IV periods, commodities offer many times more premium than stocks, and very minimal margin responsibilty to take risky positions.

 

Comparing commodities to stocks is like comparing baseball to football, or something like that.

The pricing is different, the margins are different, and the dynamics of supply/demand could not be any more different.

 

If you take the time to understand these markets, there are probably much greater opportunities, and greater returns on capital because of the very low margin requirements.

But, an entirely different set of strategies must be applied, as the dynamics are totally different.

There are so many advantages that you do not have in stock options.

20-23 hours a days where both the underlying and options are open, and at full liquidity.

No pattern day trader rules.

No margin on short calendars ( with stocks it is treated as a naked short option, unless you have portfolio margin, and there is still some margin).

The list of advantages is very long.

 

Try buying 500- 1000  AAPL pre earnings calendars at the RV price you want.

Even though AAPL is such a huge , liquid "stock", this cannot be done.

Any spread in crude , 2 legs, 4 legs, 6 legs...is .01 cent wide bid/ask, and you can buy or sell 5000 at your price without the market even noticing.

[RapperT 336]

@Yowster's point was a response specifically to our strategies which is germane to the conversation.

The fact that this dude was selling puts on crude makes him even dumber than the average option writer imo

[cuegis 683]

5 minutes ago, RapperT said:

@Yowster's point was a response specifically to our strategies which is germane to the conversation.

The fact that this dude was selling puts on crude makes him even dumber than the average option writer imo

I was responding to this quote which explained what had happened......

"they lost a substantial portion of their investors’ assets due to a short call position in crude oil"

 

How can anyone lose money with short calls in crude during the largest decline in crude history.

Plus, from what is said here, and the dates involved, their losses took place during the time of the whole price decline.

 

So it just didn't make any sense to me!

 

I doubt anything like this happened but, once upon a time, the day of the market crash of 1987, OTM calls actually were higher at the end of the day, even though the market was down 22% for the day, because IV went from something like 15 to 300

 

[RapperT 336]

gotcha

[cuegis 683]

You always have to worry when the presentation brochures from one of these places has photos all over it of mansions, yachts, ferrari's etc.

The "not so subliminal" idea that if you just give them your money, you will have all of these things too!

Then they only offer their "services" to "high net worth individuals" who are "accredited investors", with a beginning account of $1 million.

 

I'm thinking ...if you have $1 million to just casually throw at a bunch of guys, who absolutely cannot produce a track record, then you probably already have the yacht's, mansions, and fancy cars....if you choose to.

 

Like I mentioned in my earlier post, about a year ago, after listening to one of their videos, I did a search of their 2 names and , very easily, uncovered several lawsuits against them from around 2011,for the EXACT same scenario that just played out now.

If I were going to give someone $1 million, which I would never do.....you sure as heck better believe that I would do every bit of due diligence about these guy's history, and know everything I possibly could about them.

 

The fact that all of this history is "out there" to be easily seen, and so many people have given them such a huge amount for an initial account, just is too much to believe.

 

You would think that if someone had that kind of money to just casually throw around, unless they inherited it , and are outright stupid, they probably are smart enough to have earned that money, and would be inclined to do some serious research before handing it away so easily.

 

 

[mustafaoe 10]

@cuegisAre the ayn ETFs to trade on crude oil, which of them would you use? 

 

[RapperT 336]

11 minutes ago, mustafaoe said:

@cuegisAre the ayn ETFs to trade on crude oil, which of them would you use? 

 

better off trading futures options imo if you want exposure to that market

[drcruz 116]

On 11/17/2018 at 10:38 AM, RapperT said:

Also, we limit our losses in most of our short vol strategies by buying the tails.  This is very different from simply writing puts etc. much less fragile and limits downside 

I've lost 100% and more on a few positions since trying to learn option strategies. After blowing up a small account the 1st half of 2017 (not my first blowup BTW), it finally sunk in the importance of position sizing. So when I lost more than 100% on a recent BIIB position, I wanted to kick the cat, but I didn't want to jump out the window either AND I survived to trade another day. 

Edited November 19, 2018 by drcruz

[cuegis 683]

14 minutes ago, mustafaoe said:

@cuegisAre the ayn ETFs to trade on crude oil, which of them would you use? 

 

Rapper just said the same thing I was going to.

When I want to trade Crude I use the futures (CL) and it's options as there are so many advantages, like the ones I listed above.

Open 23 hours a day, EXTREMELY liquid, much better margins etc......

 

But, if you want to go with Crude ETF's, here is a list I just googled up showing the most popular symbols by size.

 

They also have the "Direxion" Etf's, which are ETF's x 2, or x 3,,, they move 2-3 times as much as the normal etf.

Then they also have the "inverse" etf's, which move in the opposite direction as crude.

They even go further with inverse etf's x3......so if the etf goes down 1 point, this goes up by 3 points, of something like that......

https://etfdb.com/etfs/commodity/crude-oil/

 

[drcruz 116]

1 hour ago, RapperT said:

 

What proponents of writing naked options never seem to consider is the issue of magnitude.  Probability of a win is only part of the story.  Luckily people never seem to learn from history so we will continue to have counter parties to all our long vol plays

I'm writing naked IWM puts in my 401K, but it's fully cash secured AND if the market dips to my 10% price target, it won't be that bad of a buy. Seems conservative enough. I'm not getting rich, but the stable part of the portfolio is earning a little money 

[RapperT 336]

6 minutes ago, drcruz said:

I'm writing naked IWM puts in my 401K, but it's fully cash secured AND if the market dips to my 10% price target, it won't be that bad of a buy. Seems conservative enough. I'm not getting rich, but the stable part of the portfolio is earning a little money 

you can write naked options in your 401k??

 

edit:  missed cash part

 

Edited November 17, 2018 by RapperT

[Lazlo 111]

40 minutes ago, RapperT said:

you can write naked options in your 401k??

 

edit:  missed cash part

 

is it consider naked if its cash secured?  seems like I can't read

Edited November 17, 2018 by Lazlo

[drcruz 116]

1 hour ago, RapperT said:

you can write naked options in your 401k??

 

edit:  missed cash part

 

Yes I got permission to sell fully cash secured puts w/ my work's Fidelity 401K account. The riskier portion is in SPY and I'm selling calls against that

[NJ_KenRob 160]

2 hours ago, drcruz said:

I'm writing naked IWM puts in my 401K, but it's fully cash secured AND if the market dips to my 10% price target, it won't be that bad of a buy. Seems conservative enough. I'm not getting rich, but the stable part of the portfolio is earning a little money 

@drcruz Would you care to share the parameters of the IWM trade?

[cuegis 683]

Have all the indices made  "head and shoulders" bottoms?

If it were true the real confirmation would be a breakout of the "neckline", which is above 2825

This is ES (S&P's), but every related index chart looks exactly the same.

 

 

Edited November 17, 2018 by cuegis

[cuegis 683]

Just for some reference about the Crude debacle that started this conversation...

This is a chart of Crude.

You can see the drop which began Oct 1 through Nov 16, and still in force.

So, this is what has me so confused when I read that lawsuit which does say the investors "lost all of their money" from being short calls in Crude...

[vasis 2]

Very dramatic video from James Cordier, but seems it's mostly natural gas (NG) which had a huge spike last days. NG is really "widows maker", plus it's not so liquid as oil, especially for options. Great example to avoid naked calls (/puts for future options) or proportional spreads with naked legs 

[vasis 2]

Forget to link video

[cuegis 683]

4 hours ago, vasis said:

Forget to link video

You mean this video?

It is the worst "hostage tape" I've ever seen!

It's anyone's guess if/how much this guy is being sincere, or was it something that just had to be done under duress?

 

Do you really think it was in good taste to be wearing a $25,000 Rolex when delivering the news that you have just lost all of your money, and owe just as much more to the clearing house?

 

Maybe instead of cufflinks, it should have been handcuffs!

 

Edited November 18, 2018 by cuegis

[vasis 2]

Yep, this video. In most cases naked options sellers fail over 3-5 years, his company has been working for 19 years...Of course - no excuses for him since last CL and NG movements might be handled through debit spreads/direct delta hedge with futures/etc

[RapperT 336]

4 minutes ago, vasis said:

..Of course - no excuses for him since last CL and NG movements might be handled through debit spreads/direct delta hedge with futures/etc

yeah this is the point rational critics have been making on twitter when being barraged by the naked writer army

[drcruz 116]

18 hours ago, NJ_KenRob said:

@drcruz Would you care to share the parameters of the IWM trade?

Nothing special, just mechanically selling the 15 delta puts. Not getting much credit  may be 129 per contract, close out at 50% profit, rinse and repeat. Estimate 4% per year because no margin, but like I said this is the safe-ish cash part of the account. If I get put the shares, then I'll sell calls until called away 

[cuegis 683]

After reading the first post here about this story I became extremely interested in the whole thing.

The story hit on Friday, Nov 16, and as of Saturday night (the 17th) I could not find one single piece of info about it anywhere on google, even under "google news".

I typed in every possible combination of words I could think of to return something...But nothing , anywhere.

That was even more strange than the actual story.

 

Eventually , I found a thread on Reddit with a long discussion about it.

Without going into all of the fine details, the basics of what happened were that they placed 2 major bets.

1- short 100% naked puts in crude oil

2- short 100% naked calls in Natural Gas.

The term "Black Swan" gets thrown around a lot but, this definitely qualifies for that title....especially the 2 trades combined, as crude and natural gas have some degree of correlation and tend to move together.

 

Needless to say, the was ZERO money management or any form of risk control.

Their sob story about the markets moving too fast to make it possible to exit the trades has no merit as both of these markets, and the options, are open , and fully liquid, 23 hours a day. So there wasn't any "gap risk" as would be the case in stock options.

 

Just to give some perspective as to how large the "once per 25 year" move was, I attached a chart of crude and natural gas to this post,so you could have some idea.

There were many opportunities for them to have taken their losses, and gotten out , along the way.

But, they ultimately lost 100% of every account's money, PLUS the accounts are now in the hole for an almost equal amount that they have to come up with.

The clearing house is Int'l FC Stone, a very large clearing house.

 

I think they should have some responsibility in all of this as they very well knew what was going for years.

These guys were just selling .05 delta strangles, in various commodities, for many years.

IV has nothing to do with any of this....it is a 100% "gamma" situation.

We all know what the statistics are on selling .05 delta strangles over time.

It worked for many years, and the "black swan" eventually reared it's head and this is what happened.

 

I have seen this before, and I do believe that markets tend to have these kinds of occurances when certain market participants are too heavily weighted in one place.

The market "knows" about this and eventually blows those positions out of the water.

 

So, naked short puts on crude, and naked short calls on Natural gas, and this is what it looks like.

 

Here is the Reddit thread I initially located...

 

Edited November 18, 2018 by cuegis

[vasis 2]

2 hours ago, cuegis said:

After reading the first post here about this story I became extremely interested in the whole thing.

The story hit on Friday, Nov 16, and as of Saturday night (the 17th) I could not find one single piece of info about it anywhere on google, even under "google news".

I typed in every possible combination of words I could think of to return something...But nothing , anywhere.

That was even more strange than the actual story.

 

Eventually , I found a thread on Reddit with a long discussion about it.

Very interesting - good catch. Several questions - the current situation is not the worst thing which may happen. In 2013/2014 NG had higher volatility, but they survived somehow OR oil in 2014/2015. And another point - how law company/attorneys (in case of Cordier its ChapmanAlbin) starts the claim process? Is it their initiative or it should be some request from optionsellers' investors?  

[cuegis 683]

41 minutes ago, vasis said:

Very interesting - good catch. Several questions - the current situation is not the worst thing which may happen. In 2013/2014 NG had higher volatility, but they survived somehow OR oil in 2014/2015. And another point - how law company/attorneys (in case of Cordier its ChapmanAlbin) starts the claim process? Is it their initiative or it should be some request from optionsellers' investors?  

Yes, I am very interested in how the whole legal claims process will play out.

It may serve to be a landmark case of sorts.

In his tearful video to the clients, just about everything he says is a lie.

I can't go through the list as it is just way too long.

But, the first lie is to keep referring to his "operation"(?) as a "hedge fund".

In no way is it any form of hedge fund.

It is a "faux" money manager who has convinced some 290 people to sign over power of attorney to manage "individual" accounts.

There is no "fund" here. If there were, then at worst, everyone would have lost 100% of what they invested, and no be responsible for any further margin calls which they all are now, because it is in everyone's "individual" names. 

 

So, he has no liability, as of yet (let's see how creative the lawyers turn out to be), and the customer, as the account is in "their" name only, has 100% full liability for everything that has been done in their name.

 

He cites the Wall Street Journal article of a few days ago which highlighted these recent black swan moves in crude and gas, and lies by saying that so many other "hedge funds" lost everything, and their livelihoods as well.

 

He is in no way a hedge fund, and any "real" hedge funds that deal in energy products are probably operating in a sophisticated manner, with a full staff of "quants" creating "real" hedges, so maybe those funds are down for the month, maybe they even caught the other side of this as they saw it coming, who knows.

 

But, the only way to land where this guy did was to do exactly what he did, which is to just sell naked options with ZERO form of hedges in place, and no plan for risk control.

 

He simply rolled the dice with other peoples money, and after having the statistical odds play out in his favor , as they tend to do for quite awhile, rather than be happy, and consider himself very lucky to have not blown up after 5-6 years, he did what kills everyone in this manner...he got greedy.

 

He just sold far, far OTM puts and calls for pennies, and the inevitable happened. He should have know what the statistics were and that his time was running out.

 

I don't believe that anything , to this degree, has happened to any "legitimate" energy fund during the past weeks..

 

The fact that he still has offices, and staff to answer the phones,and has to pay all of those expenses with whatever money his firm still has, means that there are assets that can be gone after by the "class action" law firm who , I'm sure, will know how to navigate this very well.

 

I'm interested to see if any culpability is going to be found on the part of the clearing house (FC Stone) for being a "knowing" contributor, and looking the other way while client's IRA"s were trading in a manner which is not legal to do.

 

I REALLY hope this does not wind up with some regulatory fallout which could affect, and alter,  the SPAN margin rules and ruin it for everyone.

Just like most people here, as an absolute rule, I never have positions with open ended risk.

I don't even like to do ratio's.

 

I haven't seen anything in many years that reminds me, as much as this episode has, that even though these things almost never happen...tomorrow it could.

 

[Christof+ 274]

19 hours ago, cuegis said:

It worked for many years, and the "black swan" eventually reared it's head and this is what happened.

 

Hm, haven't read the story but if this is really the case, I find it hard to understand how you can position yourself in such a way, that a move like this in NG can have such devastating consequences. If you set it a bit into perspective it should never have caught them so much by surprise. This is NG since 1990 (nearest futures contract, just plugged together one after the other)

 

Since this story obviously started a bit more than month ago, here are the monthly returns (to be fair futures contracts this time ratio-backadjusted):

 

The latest move is remarkable. However, it is anything but unprecedented. I think 'Black Swan' is a bit of an exaggeration here (in the sense of 'rare events that are beyond the realm of normal expectations in history'). It is always easy to point with fingers in hindsight. But that almost seems like they wanted to be blown up.

Anyway, with an option's delta being (roughly) the probability to end in the money, selling a delta of 0.05, would you not expect that about every 20th trade will not play out in your favour?

 

[Kim 7,943]

1 hour ago, Christof+ said:

 

Hm, haven't read the story but if this is really the case, I find it hard to understand how you can position yourself in such a way, that a move like this in NG can have such devastating consequences. If you set it a bit into perspective it should never have caught them so much by surprise. This is NG since 1990 (nearest futures contract, just plugged together one after the other)

One word: LEVERAGE.

If you read James Cordier's Seeking Alpha article Option Selling Opportunities So Good They're Scary, he explains how little margin you need to put those positions. So he applies an extreme margin to already leveraged instrument, without any hedging, and then is surprised he is wiped out. 

The article title implies that those strategies are almost free money. And then there is no mentioning of risks at all. ZERO. Anyone who was reading the article could see this coming. The writing was on the wall.

So no, I don't feel sorry for him at all. And I don't feel sorry for his clients - they could see find all the lawsuits against him with simple Google search. 

[RapperT 336]

27 minutes ago, Kim said:

One word: LEVERAGE.
 

yep beat me to it...same story with neiderhoffer.

 

edit:  there are two Neiderhoffer's, referring to victor and his famous blowup(s)

Edited November 19, 2018 by RapperT

[Kim 7,943]

Niederhoffer, Karen Supertrader, LJM fund.. there are probably many others less famous.

Naked options by themselves are not necessarily a bad thing. The problem is leverage and position sizing. If implemented correctly, naked options can probably make money in the long term. But if you overleverage, you just cannot recover from the inevitable occasional losses.

[RapperT 336]

agree.  But people see these crazy returns and think these personalities  are doing something magical when really most are just levered to the hilt and taking dumb risk when there are several reasonable ways to hedge

[cuegis 683]

2 hours ago, Christof+ said:

 

Hm, haven't read the story but if this is really the case, I find it hard to understand how you can position yourself in such a way, that a move like this in NG can have such devastating consequences. If you set it a bit into perspective it should never have caught them so much by surprise. This is NG since 1990 (nearest futures contract, just plugged together one after the other)

 

Since this story obviously started a bit more than month ago, here are the monthly returns (to be fair futures contracts this time ratio-backadjusted):

 

The latest move is remarkable. However, it is anything but unprecedented. I think 'Black Swan' is a bit of an exaggeration here (in the sense of 'rare events that are beyond the realm of normal expectations in history'). It is always easy to point with fingers in hindsight. But that almost seems like they wanted to be blown up.

Anyway, with an option's delta being (roughly) the probability to end in the money, selling a delta of 0.05, would you not expect that about every 20th trade will not play out in your favour?

 

Your'e right about the one move alone in Natural Gas.

But, it was the combination of 2 , usually correlated commodities, having extreme outsized moves in opposite directions, and they were on the wrong side of both in the most irresponsible way possible....naked short puts in crude, and short calls in gas....with absolutely no risk management controls in place.....

IV is irrelevant  as they sold these , at the time , probably 10 std dev OTM options for pennies in mass quantities, and their risk management plan was to just rely on something like this not being possible.....

 

Also, there was no "gap" risk as these markets are open 23 hours a day, and extremely liquid.

They had many many chances to get out

Edited November 19, 2018 by cuegis