A Florida based options trading firm, OptionSellers, went bust last week after it informed its clients of a “catastrophic loss event,” resulting from a short squeeze on the natural gas market.
The company sent a letter to all the client saying that the short squeeze took place at a rate “truly beyond anything I [president James Cordier] have seen in my career. It overran our risk control systems and left us at the mercy of the market.”
Basically “out of nowhere”, investors lost all their savings entirely. Some even owe money to brokerage houses to cover their massive margins. (The company was targeting wealthy individuals and to open a starter account the required initial investment was $500,000).
Following the letter, Mr Cordier has also published a youtube video with an apology (you can watch it below) where he is seen sobbing and telling everyone about the catastrophic situation. At first people thought this was a parody – unfortunately for all those who lost all their savings, it is not.
In the video, Mr Cordier speaks about clients as “family” and that he is “sorry that he capsized their boat” and wishes them good luck! The video has been since removed from their website, which is now also empty, and all their youtube content has been deleted.
How did this happen?
OptionSellers was selling naked call options on Natural Gas. Mr Cordier’s thesis was that the 2018 winter was expected warmer than previously thought. And with the over-supplies of Nat Gas coming in from higher prices – Nat Gas would weaken over the next few months.
Mr Cordier mad a bearish bet on Natural Gas by writing naked options.
(a naked call option is when a speculator writes (sells) a call option on a security without ownership of that security. It is one of the riskiest options strategies because it carries unlimited risk. The investor gains by charging high premiums).
He thought that he could take advantage of the ‘peak’ natural gas price in two ways:
a) As Nat Gas prices went up, he could sell options for higher premiums.
b) He believed prices peaked - thus the options he sold would expire and thus he will not carry any risk.
Unfortunately for him and his investors, Nat Gas shot up nearly 20% in a single afternoon last week – to its highest price since 2014 – thereby wiping out all of his client’s assets. (see chart below).
So, what are the lessons here?
- Don’t set yourself up for negative asymmetry (high risk – low reward). Making small gains at the risk of ruinous (although improbable) downside is not a sound strategy over the long term.
- Always hedge yourself and don’t risk more than you can afford to lose.
- Don’t be overconfident in your trading – have a look at this article to understand why traders lose money and what to do about it
- Don’t put all your eggs into one basket – Diversification is key
- Stay away from misleading advertising – In one of their ads (see below), OptionSellers claimed that their strategy was the smartest and simplest way to generate wealth.
- Trust only regulated and well-known brokers – click here to read on how to choose the best broker after the introduction of ESMA and MiFID II.
- If you would like peace of mind for the majority of your wealth, seek financial advice only from regulated and independent advisors. Whether you are looking for an adviser to provide long-term wealth management or buying a one-off investment, it is always important to take the time to check their credentials.
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