This is one crazy video. He starts crying 6 min or so in. He lost a lot of peoples money….
The hedge fund’s founder, James Cordier, had been a long time advocate for selling naked options to trade. He wrote a book about it and even touted selling naked options as an investment strategy on Seeking Alpha. Of course, like anybody shorting volatility, an extremely popular strategy over the last decade, options writers hope to scrape up a premium while the underlying stays calm and parked. In this case, Cordier got a lesson on why managing that risk is important – and exactly what can happen when unexpected volatility strikes.
Jack Scoville, vice president at Price Futures Group in Chicago, put it a different way: “People like to sell options rather than buying options because the odds of making money are better. However, as we saw with natural gas, that’s not always the case. You can get into a situation where the market is getting away from you pretty quickly.”
A nicer way to say it is that shorting options carries theoretically unlimited risk, which Cordier took on, and then passed on, to his clients. As Bloomberg confirms our own reports, Cordier’s clients not only lost 100% of their account values but now also owe money to the fund’s clearing broker. Meanwhile, the firm had its accounts liquidated by its clearing broker, FCStone.
Jason T. Albin, a lawyer at ChapmanAlbin LLC, confirmed to Bloomberg that some of the accounts held naked options positions and he estimated that losses from the failure of the fund could run in excess of $150 million: “FCStone borrowed on margin against their clients’ accounts to cover, which caused them to not only lose 100 percent of their account values, but now they also owe FCStone for the loans.”
A video of Cordier apologizing and sobbing (though not really explaining the blowup) likened his fund to a shipwreck and went viral within the investing community last weekend. The video can be viewed here: