The photo at the top of the article reminded me of a sight in northern New York, and apparently being duplicated in many parts of the country: Tens of thousands of obsolete and unneeded tanker cars sitting idle on rural sidings and unused lines:
The collection I saw last year next to Route 12 in New York was at least 10 miles long, and there is another one in the Adirondacks. It's an eyesore to say the least ... possibly a pending environmental hazard. If there's a declining need for oil to be transported around the country on trains, and the cars are expensive to recycle or transform, what will happen to them?
Likely the same thing that happened to all the mills throughout the rust belt. They'll get abandoned. The pessimist in me says that they'll get sold to a new corporate entity which will then file for bankruptcy and the government at some level will need to clean it up.
The only thing that would make this less difficult for me to watch is if he had his personal fortune invested in his hedge fund also, and so was similarly wiped out. In which case I'd like to hear it.
Otherwise if I was an investor I couldn't help but think: "sure, but you only lose our 2 and 20 this year, what happened to the 2 and 20 you made through the last few decades?".
It would actually be an interesting law:
"Operators of investments must have a higher fraction of their wealth invested in the fund than any of their investors".
Obviously difficult to implement but the spirit of it is fascinating to me. That way, when a hedge fund fails, the entity which has been the most ruined by it (fractionally speaking) is the CEO. It'd create genuine skin in the game.
It’s a free market, you can easily decide on your own who to invest in. You could just as well say, the investors (who should have been highly diversified, if they’re not completely retarded, btw) were making a lot of “rent-seeking” profits without any effort or skill on their own for years...
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.
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.
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)
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.
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).
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. I am sure I am missing some gaping hole there.
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.
Legally they just gave him permission (power of attorney? I think) to trade on their behalf (and create a margin account with a third party on their behalf), they didn't give him money to trade.
> 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).
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.
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.
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.)?
> 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.
The goldbugs are the worst about this, constantly whining about ”market manipulation" and various conspiracy theories with zero evidence whenever their trades go wrong.
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.
>- 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.
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.
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.
I can't believe he'd say, "I owe you a cuban sandwich" to someone whose life-savings he presumably gambled away on options. I seriously thought this was the Onion when I heard that.
Wow, easy there... a lot of ordinary people and foundations were wiped out by Bernie, not to mention other funds where clients didn't know they were investing with him...
The problem is that even if they had only 5% in that fund, the way it was managed meant that they ended up owing more than was originally put in. Options (or at least naked? Ones) have unbounded loss. You can end up owing vastly more than you started off with.
My understanding of options was essentially that you borrow N shares of stock X with a promise to buy it back. You then sell your shares to get so many $$$ (much wow, such bankruptcy ;) ). Then later when the stock goes down you buy back N shares and pocket the difference, and use those N shares to pay back your loaned shares.
The problem seems to come from selling your shares and then the stock unexpectedly (to you at least) rising so that buying back N shares costs you more money than you necessarily have.
As far as I can make out the way people make “huge amounts” from options is going down that path.
Are you saying that another common approach is to buy your options and instead bank on the value of the options themselves increasing?
This is a legit non-sarcastic question as it literally never occurred to me to do this :)
What you are describing is short-selling. An option is a contract to buy (or sell, depending on the option) 100 shares of some stock at a set price, which expires at the end of a set day (usually the 3rd Friday). This contract costs some premium, which is lost if the option expires before the owner exercises it.
You can indeed make a lot of money just holding the option until it is worth more, and it can jump several multiples of the original price, especially on unexpected price movements.
As the option cannot have a negative price, your losses are capped at whatever you spent on them.
No, the people whose money it originally was gambled it away, by giving it to him to gamble away. The minimum investment with him was $500k. I don't feel sorry for people who have that much money, but can't take a moment to understand the implications of what they choose to do with it.
i wouldn't necessarily wish this guy well. he basically ran his hedge fund in such a way that left his clients even more exposed to the risk of his poor decisions.
How do you know he “gambled in an extremely irresponsible manner”? Was he misrepresenting the risks he was taking in some way? The domain “optionsellers.com” suggests he was rather transparent...
This person claims that they were an investor and put together a spreadsheet with several days of NG trades. What I see is someone being irresponsible.
They were selling options; not buying them. Hard to blow up like that if you're buying options. Regardless of what the investor did or did not understand, my point stands; this guy was extremely reckless.
Whoops, that was an error rather than misunderstanding. Anybody selling naked options is playing an enormously dangerous game. Any investor throwing money at a game like this knows the risks, or they wouldn't even know the firm exists.
It appears that this fund was mostly in the business of selling options. Nassim Taleb often warns this is a dumb idea because in the long run something bad will happen from which you can't recover. I tend to agree and while it's sad for those involved I believe they can only blame themselves. They haven't been prudent.
Options are extremely high risk and should be avoided. Naked options are an excellent way to part a fool and his money. Investing in anything that potentially exposes you to unlimited losses is eventually going to expose you to unlimited losses and you can't make that up with volume.
Seems like a non-apology. It was all the "rogue wave" that "capsized the boat."
If a fund can't manage volatility surges, the blame isn't the rogue wave that, out of nowhere blew everything to smithereens, but the guy who steered right into it.
It's the difference between being sorry that the house you destroyed with a car was in your path vs. being sorry for having left the party drunk.
This is bad, but $150M lost in the natural gas market is not the worst I've seen. There was Brian Hunter of Amaranth [1] fame that blew up a $9B hedge fund with a bad NG trade. Amaranth had to liquidate assets for pennies on the dollar to cover the margin calls. Wikipedia is note entirely correct, here, though. It says that JP Morgan & Citadel bought the assets, but it was Citadel that bought them all at the end of the day. My understanding at the time was that JPM couldn't calculate in time the risk involved with the assets they were planning on buying.
Centaurus/John Arnold was another party here. While they were not part of the liquidation they had ridiculous returns that year as a result of the Amaranth situation. The book Hedge Hogs is a good read on Amaranth.
Dollar amount aside, I'd argue this is worse in some ways because it dealt with individual investors who are now figuring out how to fund margin calls.
Tragic. From the video, I half expected him to put a gun in his mouth at the end of it.
What happens now for this guy? He mentions it likely wiped out his firm. Likely? How can anyone who has done this have any chance to remain in business, and feel secure enough not to even go into hiding? If the losses are unbounded, can a number of his clients be totally wiped out, even if they were diversified?
He'll continue to wear a watch worth more than my car, and have a suit worth more than all my clothes combined. I have a hard time imagining his lifestyle will even suffer.
I was pretty confused by how he framed this video.
What was weird was his constant reiteration of the point that he's been living well, enjoying a well-to-do, leisurely sounding lifestyle. I mean, if that's the case, good for him, but why would he keep stressing that point so heavily in a video about how he lost a lot of his clients' wealth?
It sounds like he's someone who did inspire confidence in investors, but how would his self-described behavior do that?
A good thought experiment is to imagine a hedge fund which invests in the s&p500 all the time, but once per year takes all its capital and sells options with a 5% return and a roughly 1/20 risk of ruin. On average they beat the s&p500 by 5% every year, and only explode once every 20 years on average.
If you could charge 2 and 20 and smoothtalk investors the chances that you get rich before it explodes are pretty good.
Differentiating an investment with a negligible chance of going to zero (like the s&p500) from one with a small but nonzero chance is difficult until one of them explodes.
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[ 2.7 ms ] story [ 131 ms ] threadhttps://www.npr.org/2015/09/14/440173575/what-to-do-with-rai...
The collection I saw last year next to Route 12 in New York was at least 10 miles long, and there is another one in the Adirondacks. It's an eyesore to say the least ... possibly a pending environmental hazard. If there's a declining need for oil to be transported around the country on trains, and the cars are expensive to recycle or transform, what will happen to them?
The only thing that would make this less difficult for me to watch is if he had his personal fortune invested in his hedge fund also, and so was similarly wiped out. In which case I'd like to hear it.
Otherwise if I was an investor I couldn't help but think: "sure, but you only lose our 2 and 20 this year, what happened to the 2 and 20 you made through the last few decades?".
It would actually be an interesting law:
"Operators of investments must have a higher fraction of their wealth invested in the fund than any of their investors".
Obviously difficult to implement but the spirit of it is fascinating to me. That way, when a hedge fund fails, the entity which has been the most ruined by it (fractionally speaking) is the CEO. It'd create genuine skin in the game.
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-m...
As a side note Martin has a blog. 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.
There are no absolutes, only agreements
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)
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/no...
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).
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.
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.)?
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.
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.
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.
https://www.youtube.com/watch?v=VNYNMM0hXXY&feature=youtu.be...
It’s a stupid line. But nobody with any sense has more than 5% of their portfolio in a single hedge fund.
People go broke in casinos as well. Doesn’t make it immoral to be run a (“fair”) casino, or a smart idea to bet all your life savings.
This population tends to select itself out of the hedge fund LP investor community. (Into, for example, cryptocurrencies.)
The problem seems to come from selling your shares and then the stock unexpectedly (to you at least) rising so that buying back N shares costs you more money than you necessarily have.
As far as I can make out the way people make “huge amounts” from options is going down that path.
Are you saying that another common approach is to buy your options and instead bank on the value of the options themselves increasing?
This is a legit non-sarcastic question as it literally never occurred to me to do this :)
You can indeed make a lot of money just holding the option until it is worth more, and it can jump several multiples of the original price, especially on unexpected price movements.
As the option cannot have a negative price, your losses are capped at whatever you spent on them.
not only did people lose money, they owe money.
He got wiped out by a single delta. He was repeatedly taking leveraged bets, and ultimately losing strategy.
https://twitter.com/waklyn1/status/1064307589578579968
Specifically, this is called ergodic collapse.
If a fund can't manage volatility surges, the blame isn't the rogue wave that, out of nowhere blew everything to smithereens, but the guy who steered right into it.
It's the difference between being sorry that the house you destroyed with a car was in your path vs. being sorry for having left the party drunk.
[1] https://en.wikipedia.org/wiki/Brian_Hunter_(trader)
Dollar amount aside, I'd argue this is worse in some ways because it dealt with individual investors who are now figuring out how to fund margin calls.
What happens now for this guy? He mentions it likely wiped out his firm. Likely? How can anyone who has done this have any chance to remain in business, and feel secure enough not to even go into hiding? If the losses are unbounded, can a number of his clients be totally wiped out, even if they were diversified?
He'll continue to wear a watch worth more than my car, and have a suit worth more than all my clothes combined. I have a hard time imagining his lifestyle will even suffer.
It's a Rolex Datejust 41mm, $9350. And it can be had new from a dealer for less than that. Just an FYI :)
What was weird was his constant reiteration of the point that he's been living well, enjoying a well-to-do, leisurely sounding lifestyle. I mean, if that's the case, good for him, but why would he keep stressing that point so heavily in a video about how he lost a lot of his clients' wealth?
It sounds like he's someone who did inspire confidence in investors, but how would his self-described behavior do that?
What happened here is fat tail risk that is always present in the market.
If you could charge 2 and 20 and smoothtalk investors the chances that you get rich before it explodes are pretty good.
Differentiating an investment with a negligible chance of going to zero (like the s&p500) from one with a small but nonzero chance is difficult until one of them explodes.