The worst of the worst of the worst case scenarios came to fruition this past week after a massively irresponsible bet by OptionSellers.com went horribly wrong on Nat gas.
It looks like some folks ended up being collateral damage this week when a forced unwind in a long WTI/short nat gas bet threw – sorry – gas on a raging fire both with regard to the selloff in crude and the surge in natural gas.
“It’s pretty unbelievable”, WSJ’s Gunjan Banerji marvels, in reference to the following two snippets from an http://optionsellers.com Q&A for clients who apparently just lost all of their money and then some.
Trading naked options can be incredibly lucrative but… as witness this past week, it can also be destructive. Investors might have to go into their pocket well beyond their initial losses, which some suggest could be as high as $72million.
Shorting vol (naked) with “Other People’s Money…”? What could possibly go wrong?
Q: Have I lost all the money in account, then?
“Stocks are great, until they aren’t,” proclaims the now ‘dark’ website of Tampa-based OptionsSellers.com, explaining to ‘high net worth investors’ that “options are better but most make the mistake of buying them.”
And so, the thoughtful-looking, wealthy grey-haired gentlemen of today should given their Fed-earned money to the managed accounts of OptionsSellers.com, which touted itself as premier and highly experienced commodities options trading firm. The firm’s president and head trader, James Cordier, explained in a recent interview: “Our goal is to take an aggressive vehicle and manage it conservatively.”
Unfortunately for the clients’ managed accounts, Cordier’s actions were anything but ‘conservative’.
On November 15, 2018, OptionSellers.com notified its investors in an email entitled “Catastrophic Loss Event” that it not only lost all their money, but that they would also owe money to Intl FC Stone for margin calls.
I am writing to give you an update on the situation here with your account.
We have spent the week unwinding our short natural gas call position as expediently as possible.
Today which was to be the final day of liquidation, the market flared as prices appear to have been caught in a “short squeeze.”
The speed at which it took place is truly beyond anything I have seen in my career. It overran our risk control systems and left us at the mercy of the market.
In short, it was a rogue wave and it overwhelmed us.
Unfortunately, this has resulted in a catastrophic loss.
Our clearing firm, FC Stone now requires us to liquidate all positions. We hoped to have this done today. If not, it will be completed tomorrow.
Your account could potentially be facing a debit balance as of tomorrow. OptionSellers.com will be processing fee credits over the course of the coming days to help alleviate debit balances. What these will be will be determined after all positions are cleared.
This has in effect, crippled the firm. At this point, our brokers at FC Stone have been assisting us in liquidation.
Our offices will remain open and we will all still be here to answer your questions and process account closings. We will do everything in our power to ease what discomfort we can.
I am truly sorry this has happened.
I will be updating you again via memo in 24 hours.
In case you were wondering just that means, Dear Client, here is OptionSeller.com’s Q&A on “Debit Balances”…
What do I do about this Debit Balance?
You likely received a debit call notice from FC Stone this morning via email. You may receive it in the mail as well. This is a call to add funds to bring the balance back up to zero. Instructions for paying the balance on the notice. Any questions on debit balances can be directed directly to FX Stone at the number on the notice. Stone requests the funds asap but if it takes a few days, that is OK.
What happens if I don’t pay the balance?
We recommend balances be paid. If it is not paid, it becomes like any other unpaid bill.
For some context, not only did the NatGas calls rocket in price due to ‘delta’ changes in the underlying, ‘vega’ exploded them exponentially as NatGas vol spiked to a record high over 90… A double-whammy for the short call positions which “crippled the firm.”
For a sense of what the pain felt like – here is Goldman’s NatGas Vol Carry strategy index (a more-hedged version of the naked calls OptionSellers.com was writing)…
Ring any XIV (short vix ETF) bells?
We suspect these ‘picking up pennies in front of a steamroller’-conmen were not alone in their strategic losses.
As we noted previously, what is notable is that the move in nat gas was so powerful, it nearly caused a VIXtermination-type event in the VelocityShares Daily 3X Inverse Natural Gas ETN, which seeks to produce three times the opposite daily move of US natural gas prices and is known by its stock market ticker DGAZ.
Derivatives strategist Pravit Chintawongvanich, who rose to popularity with his hourly hot takes during the February VIXplosion that anihilated several inverse VIX ETNs, pointed out that DGAZ and its “long” leveraged cousin UGAZ could be liquidated if natural gas prices move sharply: “Because these products offer 3x daily leverage, a one day move greater than 33 per cent in either direction would blow up one of them,” he wrote.
In other words, the market was this close to another inverse ETN extinction event, only this time not in volatility but in natural gas. Meanwhile, the DGAZ’s days may be limited: starting off the month with $500MM in assets, in just two weeks it has been cut in half, and as of this morning had just $247MM in assets.
As JohnSChapman notes, unfortunately, it did not trade options conservatively. It traded “naked” rather than “covered” options, leaving investors subject to unlimited exposure. This unlimited exposure is what caused to lose all their money and more in the last few days. Thus, OptionSellers.com and its principals negligently engaged in a risky trading strategy that was unsuitable for its clients and breached its fiduciary duties to them by putting its interests ahead of its clients.
The Optionsellers.com team includes Rosemary Veasey, Matthew Donovan, James Cordier, Michael Gross, and Alicia Zedella. But here is thefirm’s president and head trader, James Cordier, in an Oscar-winning performance, apologizing to his ‘family’ of clients in one of the most surreal videos ever…
“I promise you every day when I woke up, I was checking for rogue waves…”
If you can get through the theatrics of thanking several clients for BBQ sauce and not visiting them in the south of France, Cordier explains how it was all an unforeseeable event…
“I truly invested your funds like you were a family…I’m sorry this rogue wave capsized your boat… I wish you great luck and good health.”
Are all 290 clients convinced?
‘Rogue wave’ our collective ass.. Being ‘naked’ short calls is grossly negligent with even the most risky of speculative capital – and sheer recklessness in a so-called ‘conservative’ strategy. Yep – who could have seen that coming?
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THIS IS A LESSON TRADING NAKED OPTIONS CAN KILL!
— The Option Specialist