2018: Not A Great Year For Options Writing
Nov 2018 have been choppy and devastating for many traders who were caught out on the wrong side of their trades. And recently I have received many notification from my circle of traders (including one prolific hedge fund manager) whom have suffered devastating losses to their portfolio because of adverse movements in the markets they are trading.
A Tale Of 2 Commodities
Energy commodities hogged the headlines in Nov and both for very different reasons. Let’s look at WTI Crude Oil first…
Since the high of $76+ made on 3rd Oct, crude oil has been on a decline losing more than $20 per barrel. Well, if you want to know how I managed to call the top for crude oil just before the tank, you gotta read this article. The most recent decline starting from 29th Oct has nothing less than alarming as oil does something it hasn’t done in years; which was a consecutive decline for 12 sessions.
The decline for 12 straight sessions without a pullback has erased more than $12 per barrel and this adds to the demise of many oil traders – especially for those on delta neutral strategies such as strangles or iron condors as well as for those who are counter-trending hoping to pick a bottom in oil.
Then on the other hand, Natural Gas has been going through some prolific pump action on its own…
It was a +18% day that wiped out a hedge fund (more on this later), followed by a -18% the next session. What’s more bizarre was the +10% days that followed to sum up a super volatile week for NG.
Writing This With A Heavy Heart…..
In every crazy rally or panic selling that we see, what we don’t is the massive transfer of wealth from the weak hands to the strong hands. Usually, it’s the great transfer of wealth from the retail speculators to the “big boys” and rarely the other way around.
In NG, the +18% has led to the implosion of a managed fund by James Cordier from OptionSeller.com. More details on this implosion here. His actions has led to the implosion of his managed fund, and left some of their client’s account in debit balance after the margin call. Here is what they emailed out to their clients following the insolvency of his fund.
He even released a video on Youtube, apologizing to their clients in the most inappropriate setting & attire (suited up with a rolex). This seems to insinuate the fact that “yes I blew up your account and I am still rich AF” which is oddly out of line with an apology.
To cut long story short, what he did was to sell an obscene amount of calls, which was to bet on NG not surpassing a certain price (bearish direction), on accounts that were inadequately funded. To his defence, he did balance out the play with some puts on the other side but the ratio was simply overwhelming.
When NG made the crazy move of +18%, due to the 20-40 contracts he was selling on his client’s account with balance less than $1m, the increase in margin surpasses the equity in the account leading to a margin call situation. Which means, while his strike price could still be very far away from the NG’s spot price, the increase in margin by the brokers to buffer
Money Management: An Important Pillar In Trading
Far too many times, I have watched traders go from zero to hero, and all it takes is 1 bad trade to wipe out all their gains. Often, it’s not just the gains that were affected. Alot of them have their losses eroded into their initial capital.
I have personal friends who got burnt in this drop, and lost enough to down-pay for a car here in Singapore. It just pains me to see this happening to trader over and over again.
And the reason why “over & over” again, is all down to this word – Greed.
Then What Should I Do Regarding Money Management?
Often when traders are on a roll, we tend to get complacent thinking that the winning streak would continue. We become complacent, then take on reckless position sizing thinking that the next hit on the trade would make our year.
And the funny thing about the market is when a trader becomes complacent, he tends to receive a valuable lesson from the market. My friends who lost more than what he could afford, was taking a position size that was 5x larger than mine, despite my account was 3x his size. The 15x risk finally hit him hard when he got a margin call and have to close out his positions to realize the loss.
My advice is, forget about the 1% or the 2% rule. There is no need to complicate things. All you need to know is this:
ALWAYS ASK YOURSELF HOW MUCH ARE YOU WILLING TO LOSE.
And then work your position size backwards.
In my rookie years I was bitten hard by this when I traded too big size with too high gearing. Ended up losing 40% of my account in that 1 trade. But now looking back, it is one of the best loss of my trading career. After that painful lesson, and the painful climb back, I never allow myself to lose such a high chunk of my account ever after.
With this, I wish that nobody has to ever go through such a painful loss like myself. Protecting your capital will keep you in the game long enough for you to pick up the ropes. Trade safe, cheers!