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What prevents people from setting up such LLCs and go nuts on such naked options? I mean you can bankrupt the company if they go wrong, reap it if it works out.

• tomp 8y ago
  Yeah, options are either traded on an exchange, in which case the exchange should ensure that its members/participants have enough capital to cover the trades, and that makes the exchange itself liable (i.e. the exchange is the counterparty) - see e.g. the recent case of an energy trader going belly up in Norway [1] - he wiped out the whole emergency fund set up by the exchange itself, as well as a huge chunk of the secondary emergency fund set up by the exchange members. Otherwise, you're trading options OTC i.e. directly with another counterparty (e.g. an investment bank, private trader, etc), in which case the other party bears "counterparty risk" (i.e. the proximal cause of the last financial crisis - "will the bank that I've $100bn of exposure to still exist tomorrow or not") which they should manage and/or enforce in court if necessary (i.e. options are just contracts). TL;DR: the person on the other side of the transaction needs to be reasonably sure you can hold your end of the deal. [1] https://www.forbes.com/sites/heatherfarmbrough/2018/09/14/norwegian-energy-market-trader-creates-e114m-hole-in-nasdaq-clearing-fund/#621f8746ce57 https://www.forbes.com/sites/heatherfarmbrough/2018/09/14/no...