David Jaffee of BestStockStrategy.com received a lot of questions and comments about OptionSellers.com.
The hedge fund lost around $150 million of their clients’ money, and David Jaffee breaks down where Option Sellers went wrong.
Option Sellers was a hedge fund that had around $150 million in assets under management, which is actually quite small for a hedge fund.
It was run by James Cordier, once referred to as the “options king” or the “king of options.”
Perhaps he referred to himself as this.
Option Sellers sold option premium, which is a fantastic strategy. However, they went bust for a few main reasons.
Greed & Trading Too Large
The first and second reasons that Option Sellers went bust can be combined. The primary reasons are that they got greedy and they traded to large.
When you sell option premium, there’s a way to design trades that are profitable 90-95% of the time. That’s just simply probability.
While you are profitable 95% of the time, you have to manage your trading size during the 5% of trades that go against you. If your trading size is too large, you can end up losing a substantial amount of money.
This unlikely scenario is exactly what happened to OptionSellers.com, and you shouldn’t let it happen to you.
Every single one of David Jaffee’s students makes money by taking his online options trading course.
However, some traders lost money in March 2020.
Prior to March 2020, these traders were winning almost every single trade, but it was not enough for them to earn 3% - 5% each month trading options.
Instead, they tried to make 15% per month. They sold strike prices that were too close to the current market and sold too many contracts.
When March 2020 rolled around, these positions went against them.
Instead of being able to roll and manage the position and wait for a volatility contraction like the rest of David Jaffee’s students, they were forced to close the positions for a loss.
The same is true for OptionSellers.com.
They got greedy because they were used to winning almost every trade. They were trading too big and choosing strike prices that were too close to the current market price.
In fact, their size was probably about 10 times larger than it should have been.
Option Sellers were trading commodities, which also contributed to their downfall.
Commodities have a history of going hyperbolic, whether on the upside or the downside.
It is not uncommon for a commodity to go up ten days in a row or for it to fall ten days in a row.
For Option Sellers, natural gas went up 60% in one week, which is astronomical.
When you trade commodities, they are inherently more risky than equities. Option Sellers did not properly manage risk when trading options.
Equities have more two-sided action. The price of a stock is supported by earnings, dividends, a lot of buyers, hedge funds, private offices, private wealth management, pension funds, etc.
While commodities have liquid markets, they are still relatively small when compared to most liquid stocks.
What happened with natural gas happens frequently with commodities - the same thing happened in January of 2016 when oil fell, in August of 2018 when gold fell and also in 2020 when futures prices of oil delivery went negative.
That is definitely one of the reasons why OptionSellers.com got burned. They traded commodities, which have a history of being extremely volatile.
The last thing is that Option Sellers simply got very unlucky.
When you trade commodities, there is a higher possibility that you will get unlucky.
When trading options, there is still ~5% of the time that you are going to lose.
You have to make sure that you plan accordingly, so you don’t trade too large.
When Option Sellers traded commodities, they should have built that consideration in and traded about 1/10 of the size they were trading at that time.
Key Takeaways from OptionSellers.com
Simply put, it was a perfect storm of all these factors that led Option Sellers to fail.
Retail traders have no choice but to sell option premium if they want to be profitable traders.
A study found that every single day trader loses money consistently.
If you are looking to achieve alpha and outsize gains in the stock market, you have no choice but to sell option premium.
You have to act like the casino and act like the insurance company.
Sell option premium, but take a lesson from OptionSellers.com:
Don’t get greedy, watch your size, avoid commodities, and remember that luck plays a part in it.
Want to know the best strategy for selling option premium?
David Jaffee’s online options trading course provides a comprehensive guide to winning every trade.