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I would say it is not as attractive as it was, like many I started selling commodity options on the backside of 2000's commodity boom when the air was coming out of the market but there were still fat premiums to be had DOTM on a diverse range of markets, and it seemed relatively easy to grow an account. Since then premiums have become much skinnier taking with it, much edge.
A few things I experienced have made me less enthusiastic on selling options.
The first being much like the boiling frog experiment from our school days, where a frog will just stay in the water as it gradually heats up until it dies. Where an option position will be 30% under water, no problem, 50% under water, get used to that level, no problem, 75% underwater, little bit warm but still FOTM and not at risk parameters, then all of a sudden with the exponential nature of options, Bang 200%, 300% underwater in short order. Without the ability to place hard stops as in futures knowing exactly the risk when it goes wrong can be difficult to quantify and manage when things get wild.
The other is as an option seller the pressure to constantly be looking for more premium to sell as existing premiums decay in an account which can often lead to substandard trades. Much like watching a campfire burning down there is a need to go out and look for fresh firewood, but instead of going out in the daylight when you can see, go out at all hours, in the dark in haste not sure if you picking up sticks of wood or sticks of dynamite to throw on that fire. Being very selective is key and it is easy to get sloppy especially when going well and it seems easy.
The failure of optionsellers has been a sobering shock particularly as I have seen a friend who is a client caught up in this and it’s devastating, out of respect I will say little but understand their diversified ‘submarine’ method of risk management was not really seen of late. I agree with Pariah, people are in shock at present but legal action is no doubt coming.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,386
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I thought this was the typical short sighted 5 year horizon article.
On some sights we have people pointing to 90 year back tests on the S&P500 and then on others that look at just 5 years of history. Maybe the H/J price moves of 10 years ago were exaggerated (anybody remember MotherRock (lost 0.5B) or Amaranth (lost 5B) or Centaurus (made it all)) but NG H/J is still a scarcity pricing, 'FEAR' spread. Meaning if we run out of NG in March - which has never happened, but could in principle, where do prices go before are we prepared to let people die from cold?
I agree. My first reaction was "Take the watch and cuff links off".
I have in the last month spent several hours playing with Monte Carlo simulations. Being a "Math Guy" I thought I always had a reasonable understanding of probability. I must say in the last month I have developed an understanding of how the unexpected happens much more than expected. And this is assuming normal distributions and not fat tailed distributions that we are more realistic. If Cordier could relive his career I am sure there are many alternative paths where an outcome like this never happens, but then there are also paths where it happens in the first year!
In the interest of full disclosure I had an account at OptionsSellers.com from Feb 2009 to Nov 2011. It was called Liberty Trading back then.
I opened it with $50k.
Net yearly return after commissions ($69 per round turn per contract) and fees
2009 98.8%
2010 25.2%
2011 -28.6%
I withdrew a total of $96k from account.
In 2011 he started doing different trades than the strangles he had been doing the first 2 years. He started doing ratio trades (buy 1 option call then sell 3 option calls above the long or visa versa for puts) that weren't working.
Luckily I closed Nov 2011 because July 2012 is when PFGBest blew up and that was where OptionSellers.com had their accounts.
He was doing more RTs when doing ratio spread because he was buying options along with shorts.
His trades in my account made $100,043.20 profit before fees and commissions. His commissions were $49,818. That left me $46,441.14 after his commissions and me paying other fees (exchange and NFA).
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,386
Thanks Received: 10,206
Seems like the lawyers are beginning to circle.
Two things I don't understand
1) Cordier and many in the news keep talking about his 'Hedge Fund'. My understanding is that Hedge Funds are normally set up as LLC's. If this is the case why are individuals receiving margin calls? Was it a hedge fund or was he a CTA?
2) Two days after the event, Cordier says they are still liquidating. The people that I have talked to about this all seem to agree that if the accounts were negative as described then the FCM would have taken control and have liquidated the positions. For them to be liquidating their own positions they must still be equity positive.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,386
Thanks Received: 10,206
That's interesting Ron. Trying to think what the equivalent would have been with a 2 and 20 fee structure.
2009 start with 50 + 98% = 99 + 15 (?) back in commissions = 114
2% on average 82 = 1.6, 20% on 64 (114-50) = 12.8
So year end 114-1.6-12.8 = 99.6 (almost identical)
2010 start with 99.6 +25.2% = 124.7 + 15 (?) back in commissions = 139.7
2% on average 119.6 = 2.4, 20% on 40.1 = 8
So year end 139.7 - 2.4 - 8 = 129.3 (almost identical but slightly better)
2011 start with 129.3 -28.6% = 92.3 + 15 (?) back in commissions = 107.3
2% on average 118.3 = 2.4, 20% on 0 = 0
So year end 107.3 - 2.4 = 104.9 (better)
I know real back on the envelope but would imply that in the up years the fee structure was similar, but in down years it was obviously much worse. Of course the calculations are so broad they could be way off.
He was a CTA when I was there. I suspect he still is. I don't know if he also had a hedge fund.
FCM probably liquidated NG and CL positions. They may be taking time to exit other profitable positions to try to exit at reasonable and not fire sale prices.
