https://www.tampabay.com/business/i...losing-millons-of-his-clients-money-20181123/ More details emerge. The loss is now calculated to be upwards of $200+ million. I knew it, I KNEW it, there is just no way that the loss is just $150 million with the average account size of $1 million. And he's got clients all around the world, people as far as Malaysia, Nigeria (undoubtedly the real Prince himself) and United Arab Emirates have contacted the lawyer and are suing him and FC Stone. Apparently Tempa Bay Lightning's owner is one of his clients for those of you who are hockey fans. That was the "Jeff" that he said he won't be watching hockey games with. Boy the guy is well connected.
A friend of mine was in a similar situation some time ago, and did the "right" thing by closing positions. He did loose 90% of clients that day, but saved the accounts from catastrophic losses. Had he not done it, the market would so happen "bail" him out that time around, and he would sill be managing a very large pool of AUM. But had it not gone the way it did, the clients would have been wiped out. He was the minority in this business, no management fee, fought tooth and nail with brokers to get his clients dirt cheap commissions and was living off performance only off high water mark. Unless you were ever in such situation, no one knows how you will react. Imagine this, you spend years building a business and now you faced with a decision to loose it all if you close positions, and on the other hand there is still a pretty good statistical probability of getting out of the mess with almost no scars.
They were not a fund. Too many keep using the wrong terminology and are conflating matters. He was a CTA, and all clients were managed via SMA's.
Again to clarify this was not a fund. He had trading authority on individual accounts. At the time I checked him out he was making from 20% to as high as 60% in one year. I liked his business model but he just decided not not follow his own plan of limiting the amount of option loss to double the amount of premium income received making each trade a 1:1. In this case he should have bought his calls back when he had to pay $1000 to buy the option back. The net loss would have been $500 per contract. The plan was that you gain value every day with the loss of time value. And even if the price goes against you, you still keep the full premium sold if price stays below the strike price but when it does not work, it does not work. Cut it loose and look for another trade like he said he would do.
Sounds great "in theory". There is a reason many experienced options players don't sell deep otm options, especially not in markets prone to sudden shocks or volatility spikes. Typically by the time you want to cover those short options back, the convexity has made that untenable and now you have limited liquidity (perhaps the bid offer is a mess). You also have to consider how many strikes this guy was short. He didn't limit to 1-2 strikes, it appears he was short dozens of strikes, all of which probably had a limited amount of liquidity relative to what he would have had to cover in the market (and ultimately those forced covers probably accounted for some of that dislocation).
IMHO that was a sales tactic. If you sell a delta 5 for a nickel, it only takes a small adverse move and an increase in vol to turn that nickel into a dime. I cant imagine he closed a delta 5 every time it doubled in value (would happen quite frequently). But it sounds very good on paper. When your trading deep OTM options you are certainly not taking delta bets BUT he pitched it to investors as that. I can't believe this guy lasted 30 years. Do you have any insight on if he has been using this strategy for all this time?/When he started managing money?
I know!!! This comment was posted before I knew of the true nature of the investment arrangement that he had with his clients. He kept referring to "hedge fund", "hedge fund" in his apology video so we all thought originally that it was a hedge fund until the truth came out. You are like 42 pages too late with this post in this thread. LOL