She really should have. But she broke 2 very important rules in trading. 1) Be selective with what you trade. With option premiums writing, you need to be very selective with the options you write. I bet you she tried to widen the selection of options that she was trying to write to achieve higher gains and that's when she incurred more losses. And you can't do that with option premium writing. With option premium writing, you have to stay focused over a very small group that gives you profit. Once you widen the group to include more options, you run the risk of including options that have too high of imp. vol that's not really compensated by the premium and that's when you make losses. And 2) Cut the losses early. This is especially important in option writing because when writing options, your profit potential is limited to the premiums that you got so there is no letting the profit run. When you can't let your profit run then it becomes especially critical that you cut your losses early because you won't be able to grow your profit enough to compensate for your losses if you don't cut them early. Cutting losses early means no rolling the losses forward. Once you've made losses, you have to let it go. Close the option with the losses and start anew with the next batch of option writing. If you start rolling the losses forward that's when you get stuck with bigger and bigger and bigger losses that just stay forever and ever and ever there albeit unrealized until it snowballed into something so huge that it's out of control and bigger than your profit. The bigger the losses, the more afraid she must've been in cutting them and also thinking that as long as she doesn't close the position she can just forever hide those losses in unrealized losses and then when the stock eventually turns around she can make the losses back or at least mitigates them. The problem with that thinking is there is no guaranteed time when the stock is going to turn around and by how much, 5 months, 5 years, 10 years, never and meanwhile the losses is still accumulating. If she had closed the losing option positions when the loss is still small, she would've been fine because she would've been able to cover them with the winning options. Yes she would've shown a loss on the books but it would've been manageable unlike the humongous losses that she's now forced to face.
Thank you. Appreciate your coaching. 1. The fellow who introduced me to options five years ago only wrote options, calls and puts and only on one stock. He has been doing that for over 10 yrs and was happy with ~10%-12% a year returns on average. 2. I do have a question: Do you have any statistics that rolling ended up worst than just get out?
Thank you but wasn't trying to coach though, just trying to share my personal take on option writing. Good for him! No I don't have any statistics, thought this super trader Karen's plight is proof enough. LOL
JSOP makes an interesting suggestion and like you say Pekelo as the settlement is secret we will never know. My opinion - which is no more than that - is that Karen had a trade that gradually overextended you. 30 years ago when I first started trading options I figured out that LEAPs on indexes were cheap. So I reckoned that a great strategy would be to buy a five year LEAP on an index and then write 3 months long index calls against that LEAP. Eventually the undervaluation of the LEAP would be caught up with as they ceased to be LEAPS but entered regular option pricing territory. Problem was this - the market was in bull mode - it went up gradually all the time - now this was in principle not bad. The LEAP did go up as well but the shorter term call gained more - this forced me to either buy back with more cash to recentre at the money or to start selling deeper ITM calls. A year and a half in I ran out of cash to do that and had to liquidate the position which all told lost me money because the LEAPs had not gained enough ground to make up for the much faster rises of the short term options. I felt pretty bummed about it because paper trading this throughout its lifetime I came to the conclusion that IN THE END I would have come out ahead exactly as expected. Putting it down to me being a numpty I recall feeling vindicated when the German conglomerate Metallgesellschaft fell in exactly a similar sort of trap a few years later: https://financetrain.com/risk-management-case-study-metallgesellschaft-ag-mgrm/ I cant access the Yahoo group you keep referring to - but scaling and cash at hand are the key things if you hedge. Always remember the great adage: "The market can stay irrational longer than you can stay liquid." Its perfectly possible for Karen to have been caught in a squeeze rolling forward a loss as was and then being asked to redeem a large part of her fund. The original complaint included reference to her original investor who was a very large part of her holding - as her positions were she shouldnt afford to return the money.
"The court entered the consent judgment against Hope and Bruton ordering them to pay disgorgement of $1,237,235 and a civil penalty of $250,000." https://www.sec.gov/litigation/litreleases/2018/lr24285.htm
I never really brought this thread to its end, so as a closure, thanks to Robert Morse, here are the court reference links: https://www.sec.gov/litigation/admin/2018/34-84198.pdf https://www.sec.gov/litigation/admin/2018/ia-5038.pdf She and her firm are no longer registered with the SEC or the NFA, https://www.adviserinfo.sec.gov/IAPD/IAPDFirmSummary.aspx?ORG_PK=157748 https://www.nfa.futures.org/basicnet/Details.aspx?entityid=OZciTXLWmdw=&rn=Y https://www.nfa.futures.org/BasicNet/Details.aspx?entityid=9VPANMdQyO8= As a result of the case she can not practice as an accountant or a HF manager anymore. Further discussions about Karen's future etc. should be done in this thread: https://www.elitetrader.com/et/thre...t-tastytrade-s-geeks-on-parade.328651/page-11 Pekelo, your court reporter is signing off....