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Such is the life of an option seller, especially naked option sellers. You are picking up the proverbial nickle in front of the steam roller. The really unfor

Such is the life of an option seller, especially naked option sellers. You are picking up the proverbial nickle in front of the steam roller. The really unfortunate part of this is that some of his clients actually owe more money than what was in their account. There is a scummy way of managing money that some CTA's use where you don't get the proper license to manage others money as a hedge fund and instead just have people put money into accounts and then they give you the right to trade. Due to the use of leverage when the market moved against their naked short Nat Gas positions all the collateral posted in the accounts were not enough to covert the losses so some people are not only out the amount they wagered, but more. And the worst part of it is the manager blaming this on an unforeseen event. Everyone who sells options knows that rule one is never be naked when you are short as your losses can be unbounded. The reason for this is that if you have traded for even a short period of time you realized that while the market is liquid most of hte time, there are times when its not and the only thing you can do is watch it move while realizing you can't exit a position. This happend to short sellers of KBIO when they thought they were riding a shitty stock to zero, when Martin Shkreli bought it for a premium causing margin calls for everyone short it. See: https://www.investopedia.com/articles/investing/112315/did-martin-shkreli-intentionally-burn-kalobios-shorts.asp https://www.investopedia.com/articles/investing/112315/did-m... As a side note Martin has a blog. http://martinshkreli.com/ http://martinshkreli.com/ its actually pretty good as this is what he does for a living and when hes out of prison he's going to try and go back to it so this is really the only way he can redeem his brand. I expect him to put everything he has into the blog. its' a good source of trading ideas. TL/DR - never sell options - if you do then never sell naked options - if you do make sure you can get out of your trade - if you can't get out of your trade make sure you are well capitalized for loss absorption - if don't have enough to cover your losses don't apologize for losing your clients money while wearing a $10,000 watch and post it for the rest of the world to see.

AznHisoka 8y ago
Why would his clients owe money? The fund is the one doing the trading, so it's the fund that would owe money.
- gammateam 8y ago
  Because thats how the contracts were set up shrug emoji There are no absolutes, only agreements
- whatok 8y ago
  They were setup as managed accounts. Clients actually own the assets and in turn the liabilities.
  - AznHisoka 8y ago
    Got it. Seems weird anyone would sign up for something like that.
    - olliej 8y ago
      I’m sure it was “cheaper” or they were friends/acquaintances and he just said “I can make you money” - because he wasn’t a “real” (eg with the presumably expensive accounts and control systems) it was probably easiest to have it set up that way. Question for people who understand things better than me: isn’t setting up an LLC in America quite cheap? Couldn’t an individual make an LLC to hold their investment funds, and then give him control of those accounts? Wouldn’t the LLC protect them? (Not saying that such a layer is free, but it seems like a relatively cheap protection)
      - whatok 8y ago
        Without getting into specifics, some investors prefer separately managed accounts. It has nothing to do with difficulty of setting things up and everything to do with preference. That said, if for some reason I wanted to invest in something that sold naked options, I would prefer to invest with an LLC.
        tomp 8y ago
        Aren't managed accounts orthogonal to liability? e.g. if I wanted to invest my money in a managed account, I could still set up (my own) LLC to limit liability (and that could be better even for e.g. tax reasons).
tomp 8y ago
> There is a scummy way of managing money that some CTA's use where you don't get the proper license to manage others money as a hedge fund and instead just have people put money into accounts and then they give you the right to trade. That’s not scummy. Some clients want it set up that way, so that they have control over the money, they can terminate their account at any time or transfer control to another asset managemer, there’s no chance of the fund suspending withdrawals or something similar (which you could also say is scummy).
- chollida1 8y ago
  If you want to manage other people's money there are structures setup for this that wouldn't have caused people to owe more than they had in their accounts. But they did take this short cut and it cost them, it cost some of them more than they gambled. I stand by the language I used. I guess a good test to see if this is a good structure or not would be to look at any of the respectable people who manage money to see if they use a similar setup. Open question to you. Point to one reputable fund that still uses this type of structure..... I'd rather invest in a hedge fund, or Venture Capital fund, or pension fund that has a proper setup than an adhock setup like optionsellers.com used. Liability is only on of the many issues that a proper corporate setup fixes. I guess to give you the maximum benefit of the doubt using this structure is like running a business, taking money, signing contracts, etc without a corporation. I mean you can, but one mistake wipes out your family. With a proper corporate setup you are much more protected.
  - whatok 8y ago
    SMAs are a common fund structure. It's a terrible idea for a strategy like this but for other strategies/asset classes where you either don't have as much potential volatility or drawdowns, I don't see the problem with them.
  - tomp 8y ago
    You're mixing up a few things. Investors/clients are usually other funds, which have their own corporate structure, etc. In any case, protection/limiting liability is the responsibility of each individual (institutional) investor. All I'm saying is, it's perfectly reasonable to have money in a managed account. That might even be much more respectable! Imagine I'm a small, unproven but promising fund manager... What is going to be easier, convince a $10bn pension/endowment fund to give me the money (that I then channel into offshore corporations "for tax purposes"), or to give the money into an account at some reputable investment bank like BAML or GS and only allow me (or anyone else) to invest/direct/manage that money (in strictly defined terms that are under control of the custodian bank, e.g. delta limits, or asset class/stock restrictions, etc.)?
ChuckMcM 8y ago
> never be naked when you are short as your losses can be unbounded. I wish it was a requirement for people to have this tattooed to their body if they start trading naked options. It is so sad to watch a friend, who is otherwise brilliant, get caught up in the idea that they can make unlimited money because they know that this commodity is going to "drop like a rock." And then watch them lose their savings when things were different than they expected them to be. You get to hear about conspiracies of people who "tricked" them, rating agencies that "lied" about what was going on, etc etc. So very sad.
- nradov 8y ago
  The goldbugs are the worst about this, constantly whining about ”market manipulation" and various conspiracy theories with zero evidence whenever their trades go wrong.
nuguy 8y ago
I remember stumbling upon his YouTube channel and being very surprised at how much I admired him. He would do live-streams with very positive topics like learning chemistry and programming. There was an undercurrent of very negative vibes though. There was an underlying sense of aggressiveness that is captured very well by this line I found in his blog “I have a very long memory and an enormous amount of money growing at a rapid pace. Play games with your career at your own risk.” geez, I hope I haven’t become his enemy by posting this! Despite his street-fighter style I do think he was used as a prop and a scapegoat very unfairly.
DINKDINK 8y ago
>- if you do make sure you can get out of your trade You can't ever properly hedge writing options. Black-scholes zombies and "dynamic" hedgers refuse to realize that markets move in lurches not continuous functions.
whatok 8y ago
Your first tl;dr point should be "never sell options without proper risk management in place". Selling vol is a perfectly sound strategy in itself. It's just very easy to do wrong.
icu 8y ago
"never sell options" Well, this really depends. I wouldn't recommend options for most investors because it is a complex area and therefore one of the highest risk financial instruments, however, it is possible to make good returns with covered calls as long as you have the time, research skills and capital to pull it off. My strategy was pretty simple, but difficult to execute. I first entered the market by selling a put on a stock I already did the homework on that I wanted to own, and I had to cash on hand to purchase if I was executed. I would keep writing puts until I got executed... then I would write covered calls until I got executed. Rinse and repeat. This does very well while the markets are going sideways or up, but obviously can go badly when the market goes down. However, if you really wanted to own that stock, and you did your homework property, you don't mind holding that stock through the downturn (hopefully it keeps paying you dividends). "if you do then never sell naked options" I would tend to agree with this statement... however as I previously mentioned, there is nothing wrong with selling puts for stock that you want to own, at the strike price you want, assuming you have the cash in your account to actually purchase the stock if you are executed. Oh and I would never bother with "American" options, only "European" ones... less risk of premature execution. "if you can't get out of your trade make sure you are well capitalized for loss absorption" Totally agree, all investors should have earned the right to risk by having their financial affairs in order including a well funded emergency fund etc. However I would agree with the sentiment that an ounce of prevention is worth a pound of cure... basically manage your downside, the upside will take care of itself. "if don't have enough to cover your losses don't apologize for losing your clients money while wearing a $10,000 watch and post it for the rest of the world to see" I think this guy was in total shock, and although insensitive, I doubt the optics of his watch was on his mind. Managing other people's money is incredibly stressful when things are going right... and hell on earth when they are not. This guy could have hid from the world if he wanted but instead had the guts to basically commit YouTube Seppuku. Pretty sure Hanlon's razor applies here.

AznHisoka 8y ago

Why would his clients owe money? The fund is the one doing the trading, so it's the fund that would owe money.

gammateam 8y ago
Because thats how the contracts were set up shrug emoji There are no absolutes, only agreements
whatok 8y ago
They were setup as managed accounts. Clients actually own the assets and in turn the liabilities.
- AznHisoka 8y ago
  Got it. Seems weird anyone would sign up for something like that.
  - olliej 8y ago
    I’m sure it was “cheaper” or they were friends/acquaintances and he just said “I can make you money” - because he wasn’t a “real” (eg with the presumably expensive accounts and control systems) it was probably easiest to have it set up that way. Question for people who understand things better than me: isn’t setting up an LLC in America quite cheap? Couldn’t an individual make an LLC to hold their investment funds, and then give him control of those accounts? Wouldn’t the LLC protect them? (Not saying that such a layer is free, but it seems like a relatively cheap protection)
    - whatok 8y ago
      Without getting into specifics, some investors prefer separately managed accounts. It has nothing to do with difficulty of setting things up and everything to do with preference. That said, if for some reason I wanted to invest in something that sold naked options, I would prefer to invest with an LLC.
      - tomp 8y ago
        Aren't managed accounts orthogonal to liability? e.g. if I wanted to invest my money in a managed account, I could still set up (my own) LLC to limit liability (and that could be better even for e.g. tax reasons).

tomp 8y ago

> There is a scummy way of managing money that some CTA's use where you don't get the proper license to manage others money as a hedge fund and instead just have people put money into accounts and then they give you the right to trade. That’s not scummy. Some clients want it set up that way, so that they have control over the money, they can terminate their account at any time or transfer control to another asset managemer, there’s no chance of the fund suspending withdrawals or something similar (which you could also say is scummy).

chollida1 8y ago
If you want to manage other people's money there are structures setup for this that wouldn't have caused people to owe more than they had in their accounts. But they did take this short cut and it cost them, it cost some of them more than they gambled. I stand by the language I used. I guess a good test to see if this is a good structure or not would be to look at any of the respectable people who manage money to see if they use a similar setup. Open question to you. Point to one reputable fund that still uses this type of structure..... I'd rather invest in a hedge fund, or Venture Capital fund, or pension fund that has a proper setup than an adhock setup like optionsellers.com used. Liability is only on of the many issues that a proper corporate setup fixes. I guess to give you the maximum benefit of the doubt using this structure is like running a business, taking money, signing contracts, etc without a corporation. I mean you can, but one mistake wipes out your family. With a proper corporate setup you are much more protected.
- whatok 8y ago
  SMAs are a common fund structure. It's a terrible idea for a strategy like this but for other strategies/asset classes where you either don't have as much potential volatility or drawdowns, I don't see the problem with them.
- tomp 8y ago
  You're mixing up a few things. Investors/clients are usually other funds, which have their own corporate structure, etc. In any case, protection/limiting liability is the responsibility of each individual (institutional) investor. All I'm saying is, it's perfectly reasonable to have money in a managed account. That might even be much more respectable! Imagine I'm a small, unproven but promising fund manager... What is going to be easier, convince a $10bn pension/endowment fund to give me the money (that I then channel into offshore corporations "for tax purposes"), or to give the money into an account at some reputable investment bank like BAML or GS and only allow me (or anyone else) to invest/direct/manage that money (in strictly defined terms that are under control of the custodian bank, e.g. delta limits, or asset class/stock restrictions, etc.)?

ChuckMcM 8y ago

> never be naked when you are short as your losses can be unbounded. I wish it was a requirement for people to have this tattooed to their body if they start trading naked options. It is so sad to watch a friend, who is otherwise brilliant, get caught up in the idea that they can make unlimited money because they know that this commodity is going to "drop like a rock." And then watch them lose their savings when things were different than they expected them to be. You get to hear about conspiracies of people who "tricked" them, rating agencies that "lied" about what was going on, etc etc. So very sad.

nradov 8y ago
The goldbugs are the worst about this, constantly whining about ”market manipulation" and various conspiracy theories with zero evidence whenever their trades go wrong.

nuguy 8y ago

I remember stumbling upon his YouTube channel and being very surprised at how much I admired him. He would do live-streams with very positive topics like learning chemistry and programming. There was an undercurrent of very negative vibes though. There was an underlying sense of aggressiveness that is captured very well by this line I found in his blog “I have a very long memory and an enormous amount of money growing at a rapid pace. Play games with your career at your own risk.” geez, I hope I haven’t become his enemy by posting this! Despite his street-fighter style I do think he was used as a prop and a scapegoat very unfairly.

DINKDINK 8y ago

>- if you do make sure you can get out of your trade You can't ever properly hedge writing options. Black-scholes zombies and "dynamic" hedgers refuse to realize that markets move in lurches not continuous functions.

whatok 8y ago

Your first tl;dr point should be "never sell options without proper risk management in place". Selling vol is a perfectly sound strategy in itself. It's just very easy to do wrong.

icu 8y ago

"never sell options" Well, this really depends. I wouldn't recommend options for most investors because it is a complex area and therefore one of the highest risk financial instruments, however, it is possible to make good returns with covered calls as long as you have the time, research skills and capital to pull it off. My strategy was pretty simple, but difficult to execute. I first entered the market by selling a put on a stock I already did the homework on that I wanted to own, and I had to cash on hand to purchase if I was executed. I would keep writing puts until I got executed... then I would write covered calls until I got executed. Rinse and repeat. This does very well while the markets are going sideways or up, but obviously can go badly when the market goes down. However, if you really wanted to own that stock, and you did your homework property, you don't mind holding that stock through the downturn (hopefully it keeps paying you dividends). "if you do then never sell naked options" I would tend to agree with this statement... however as I previously mentioned, there is nothing wrong with selling puts for stock that you want to own, at the strike price you want, assuming you have the cash in your account to actually purchase the stock if you are executed. Oh and I would never bother with "American" options, only "European" ones... less risk of premature execution. "if you can't get out of your trade make sure you are well capitalized for loss absorption" Totally agree, all investors should have earned the right to risk by having their financial affairs in order including a well funded emergency fund etc. However I would agree with the sentiment that an ounce of prevention is worth a pound of cure... basically manage your downside, the upside will take care of itself. "if don't have enough to cover your losses don't apologize for losing your clients money while wearing a $10,000 watch and post it for the rest of the world to see" I think this guy was in total shock, and although insensitive, I doubt the optics of his watch was on his mind. Managing other people's money is incredibly stressful when things are going right... and hell on earth when they are not. This guy could have hid from the world if he wanted but instead had the guts to basically commit YouTube Seppuku. Pretty sure Hanlon's razor applies here.