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From today's press: Remember Canarsie Capital, the hedge fund run by the former head of risk management at Morgan Stanley and a 28-year-old former Galleon trader, which blew up in January, prompting Owen Li, the former Galleon trader, to tell investors that he was "truly sorry" for losing all their money? Well, Li pled guilty to securities fraud yesterday. Here's the criminal case against him, and the Securities and Exchange Commission press release and order. I have to say, it sure sounds like Canarsie's risk management was terrible. And prosecutors and the SEC make out a fair enough case for fraud, in that Li submitted fictitious trades to his prime broker to get more margin, and lied to investors about his performance in some months. But that stuff doesn't seem closely related to the actual blow-up, which was achieved in the time-honored way of putting all the money into risky options and hoping for the best: Beginning on or around December 31, 2014 and continuing through January 15, 2015, Li used cash in the account and proceeds from stock sales to buy long positions in market index options. Virtually all of these purchases were in long call options with an expiration date of January 17—in other words, short-dated long options. At the same time, Li took down and eventually eliminated all short positions in the account. The result was an entirely long portfolio with no hedge. On January 16, the market for index options moved against Canarsie’s positions, resulting in losses of approximately $39 million (approximately $28 million in expired premium and approximately $10.5 million in trading losses), leaving the Master Fund with no equity, short or options positions, and only $211,685 in cash (plus approximately $289,568 in its bank account). As a result of Li’s risky trading, Li caused the Master Fund to incur approximately $56.5 million in losses between December 31, 2014 and January 16, 2015, substantially depleting all of the Master Fund’s assets. I often tell you that, if you have material nonpublic information about a merger, you shouldn't use it to go buy short-dated out-of-the-money call options on the target. But buying short-dated call options with all of your investors' money with no information, as a pure gamble for redemption, doesn't seem great either. In other words, don't invest 100% of your total net worth in a short dated out of the money call option that expires next week. You just might go broke.

*Correction "even if its accuracy" I definitely recommend "Trading the Close" every day M-F 3:15-3:30 et on TastyTrade with Tim. It is the best part of the entire site.

Sure. Yes Prophet charts is incredible and even if it's accuracy were 55% it still would be worth an enormous amount of money. More intriguingly it also gives data relevant for the overall economy and sectors so there's some scholarly heft there. This is where I want to craft a more probabilistic directional strategy that complements Kim's (likewise brilliant) nondirectional strategies. With Dan Passarelli's approach, who authored "Trading Options Greeks" (and also runs another mentoring service which I am a customer of - disclaimer) he has some key rules that in the background accompany a strict understanding of the combined effects of all trades in a spread to evaluate the final values for delta, gamma, vega and theta. He is important because he traded and led education at the CBOE, and learned from Jim Bitman, one of the first option educators. Number one, is that you generally want to trade credit spreads and condors and butterflys only in areas of high volatility by looking at volatility charts of the underlyings of interest. Volatility percentile should be over 50-60% when trading those types of strategies. Also it is preferable to engage in calendar/diagonal trades when you have nice IV skew where shorter term options have a higher volatility than the long term one you are buying. Volatility must be considered for every trade you do and if low should make you think twice about the trade (unless buying/debit spreads are appropriate). The major downside is his technical analysis which I think is not sophisticated enough. Ergo, enter Tim Knight and prophet. There are more details about his strategies and advice but I probably should stop there and I would ask him if you interested further. His books are quite informative.