Risk/Reward Basics Bypassed In Hedge Fund Blowup
Last week, news of a hedge fund blowup spread over financial media. On the wrong side of sharp moves in energy markets, James Courdier, OptionSellers.com money manager, notified his clients that all is lost. His Tampa-based options firm sent millions of dollars down the drain. He put out a pathetic, insufferable, ten-minute apology video, placing blame on a “rogue wave,” which capsized their boat.
His blaming a rogue wave is a tidal wave of baloney.
Checking the markets with a glass of wine isn’t piloting the ship properly. Successful speculation takes knowledge, discipline, courage, and hard work.
Here are a couple key lessons you can glean from the OptionSellers disaster, so you can avoid getting tossed overboard.
Start by not losing sight of the basic risk/reward characteristics of options.
Option buyers have the right, but not the obligation, to buy or sell a set amount of an underlying instrument for a specified price within a specific amount of time. Option buyers have an always known and strictly limited risk at all times, with no threat of margin calls or forced liquidation. Option buyers are the only ones who possess limited risk potential for unlimited returns.
At Options Hotline, we specialize in option buying. The ability to make great options gains from small moves in the underlying instrument with a completely limited risk is what we call Superleverage. And option buyers are the only ones who have it. So why isn’t everyone an option buyer?
The odds are against option buyers. If the underlying instrument doesn’t move fast enough or far enough in your desired direction, you can lose your entire bet, but not one cent more. When you get it right, you can multiply your money in a short amount of time. That is fun.
Option sellers have an obligation to buy or sell a set amount of an underlying instrument for a specified price within a specific amount of time. Option sellers have limited returns with unlimited risk. So why would anyone be an option seller?
Options are wasting assets. Time-value decay accelerates as options approach expiration. The odds are with option sellers, to make it worth their while for taking on such an obligation. Selling options can be part of a viable strategy to earn instant income and actually lower your risk. But it must be done with protection.
Don’t be greedy.
This is what sank Courdier’s boat. There are simple strategies which option sellers can employ to limit their risk. But those strategies lessen the return. Courdier left his clients’ funds exposed to unlimited risk at all times. When the adverse market move hit, they were sunk.
It was no surprise. And it was not the fault of the market. A hedge fund should be hedged. Hey Courdier, capisce?
As we approach our 30th year of publication, Options Hotline keeps a steady hand on the tiller to help you navigate all market conditions. We only recommend limited risk trading, because we understand the basic characteristics of options and know that successful speculation is as much a matter of honing your survival skills as it is finding winning trades. Sound money management is often the key to trading success.
So be prepared to use options and our Options Hotline service to vie for fun and profit. You can sleep well at night if you trade with risk capital only (not funds you need to live on) and are not surprised when the market moves against you.
Speculate based on what you can lose, not what you can gain.
Good luck in your trading.