As I might have heard, recently OptionSellers.com got bankrupt, and customers lost 1.)Their entire Balance 2.)They are in negative , aka into margin debit balance(unsecured), which would be going into collections, if unpaid. Using that as an example:- My question is, if I trade into my account as an individual(or joint owner with survivorship), how do I shield myself, in such situations, where if I screw up something, losses are limited to ONLY what my trading account balance, and NOT beyond that. I know there are multiple scenarios which can blow up your account (into negative), if you do NOT hedge properly, such as 1.)PIN RISK 2.)TAIL RISK 3.)NAKED OPTIONS or FUTURES. Hence asking, this questions. Does LLC protect in this scenario, if you are managing your accounts individually? Basically, I don't want my family to get affected, into REAL Negative BALANCE, because of any catastrophic loss. I currently have my account with TDAMeritrade, with JOINT OWNER WITH SURVIVORSHIP RIGHTS. Thank you for your time!!!
And entity like an LLC will provide some protection of assets outside the entity but the broker or in this case the FCM will still go after you and you will incur the expense of protecting yourself. The best way to protect your personal assets outside the risky trading is to enter a pooled asset as a limited partner like a Hedge Fund or a CPO. To avoid catastrophic losses in your personal account, do not take excessive risk. The risk is your risk not your broker's.
This question has been asked here before. If it were that easy don't you think everyone would do it? Exchanges would not function if everyone were able to shield themselves from being a counter party risk.
Very good question and I hope someone who knows can give a firm answer. My understanding is that Corp/Llc will not protect you as it will be viewed as simply a vehicle to circumvent liability. It's in your brokers interest to make sure you don't blow up their (clearing's firm) money, so they should NOT allow you to establish these kind of positions. I think if the optionsellers clients tried it on their own, they would not be able to do it. The clearing house didn't want to loose a large customer and was more lenient it seems to me.
It’s the FCM, FC Stone that let this get away from them. The clearinghouse, CME Group would of been clueless to the capitalization behind this position as long as adequate maintenance margins were being kept on deposit with the clearing house.
Just don't trade on margins!! Don't trade for more than what your account has. For example, if your account only contains $100,000, don't put in more than that in trades. Then the maximum you will lose is $100,000 and no more. If you let someone else manage your money, then like @Robert Morse said, put in a hedge fund, a REAL hedge fund, or mutual fund or any pooled fund not like optionsellers.com who was still trading your personal accounts on your behalf with a POA. What optionsellers.com had was not a hedge fund as opposed to what Cordier was making it out to be in his apology vide.
1. LLC can protect you against some legal liability. A brokerage account in the name of an LLC would have either (1) substantial LLC assets to cover any debits, or (2) personal guarantees. 2. Your Joint Ownership puts all of your assets and the joint owner's assets "on the line" for any and all debits. No broker is in the business of being ultimately held financially responsible for the debits of its customers. Your FCM is responsible for settling all trades/balances at the end of the day as per exchange rules, but that doesn't mean you are off the hook if you run into debit, LLC or not.
I agree with that, but there are still scenarios, where you could be at risk. Think about pin risk, sometimes illiquidity risk. Basically, if at any point of time, because of some life events, you did NOT take necessary actions on your open position, this may back-fire at you. Well, if all goes well, i would NOT have asked for this question, however finance world is vast, and there are lot more scenarios where you are at risk, without even you knowing of it. The first time i learnt about PIN RISK, was when I actually had a PIN RISK, with more than $1M, which could have put me in negative. Luckily, no-one exercised that option, due to very less price difference, and I just got saved/lucky. There could be many such scenarios, which you may get aware, only when you actually face it. Again, thank you for your inputs or any guidance. I am just few years in options, and not GREEN so far, but hope will get there soon!
The human brain has a thing where it gets really hung up on spectacular but spectacularly unlikely events. A good example of this is the almost universal uneasiness when flying and not when driving, despite the fact that no-one died in a commercial airline crash in the U.S. in 2017, for example, while over 40,000 people in the U.S. died in auto crashes. Speaking of pin risk, how many people lost a significant amount of money due to pin risk last year versus the number of people who lost their life in a car crash. Even normalizing everything out and doing the math specifically for you, I'm guessing your chance of dying or being significantly injured in a car crash is significantly greater than your chance of suffering a loss by pin risk. Just to use your specific example and one of dozens of common risks. So is there risk that you lose more than your capital when investing using margin or leverage? Sure. Is it a significant amount of risk compared to all of the other myriad risks you take every day with everything from your finances to your life? I would submit that it is not, in fact it probably ranks way, way down there. I used to fly for a living and we talked and thought about risk all the time. We did our best to eliminate risk as much as possible, but short of not flying we realized there was always going to be risk. So we instead tried to recognize and quantify risk so that we could minimize it. A couple of heuristics from that world you might find useful in investing: -Think of risk as severity times probability in order to somewhat normalize it. If we had something that was very unlikely to happen but would result in auguring a large hole in the ground we may classify that in a similar manner to something that was more likely to happen but that would probably end up in a survivable landing. Not an exact science for us as pilots but can be more so for us as investors. -Add to that a multiple of the time you're exposed to the risk. If you can limit the time you're exposed to a risk, even one with a high number from above, you limit your overall risk. As a pilot it meant minimizing your time in flight regimes that were unrecoverable from something like an engine failure. For investors that might mean minimizing your positions at the end of a session to avoid a regime where your profits are unrecoverable from a liquidity crunch. -At the end of the day, realize that you're in a profession that has more risks than other professions. If the joy of being a pilot or investor doesn't overcome those risks, you may have a problem with your choice of careers, not a problem of risk.