Option Sellers: Selling Options Gone Wrong
Lessons from a $150m blow up
James Cordier seemed to have cracked the market code….
Nice chunky regular monthly returns with very little drawdown.
An investor’s wet dream…
But all was not what it seemed.
Cordier was really walking through a field of landmines, where one false move would blow him and all of his loyal investors up into smithereens…
James Cordier was the CEO and fund manager of a company called Options Sellers.
Can you guess his strategy? No prizes…
Yep, it was selling options.
Specifically in Natural Gas and other commodities.
A quick brief on selling options for those who don’t know.
It’s kind of like selling insurance, if you sell a far-out-of-the-money option, you collect the premium as long as the price isn’t at or above (in the case of a call option) the strike price at the expiry time.
(Here’s a good explainer: https://tastytrade.com/
Imagine selling building fire insurance on a skyscraper in Canary Wharf.
The buyer of that contract wants to hedge against disaster. (Understandably)
If you’re the seller of that contract, you get to collect that premium each month as long as there is no fire…
But should there be a fire, you are going to have a very hefty bill.
You get the idea.
It’s a great earner… until it isn’t.
You need to know what you are doing, understand the risks, and be highly experienced to play the game.
Cordier’s strategy was selling both deep out-of-the-money puts and calls, otherwise known as a short-strangle.
Most of the time this strategy worked. He was making money month after month.
And by the nature of the instrument and markets he was trading, he could leverage himself right up.
All looked rosy and Cordier looked like a genius.
Reports estimate he was managing money for 290 clients, and with a minimum investment of $250k he was probably managing north of $150m.
Now I won’t go into the unnecessary finer details on what happened, but essentially Cordier miscalculated how commodity options behaved, and he was using way too much leverage.
Which left him pretty vulnerable to price spikes.
Sure enough, James got caught with his pants down.
He had sold deep out of the money calls on Natural Gas and was waiting to collect his juicy premium like he did every trade.
But then in late 2018, Natural Gas did what you don’t want it to do when you are selling calls.
It spiked and it spiked hard…
And that did two things.
- It moved the underlying price sharply higher,
- It spiked the option premium as more and more people were looking to buy calls rather than sell them.
This was very bad news for James…
To cut a long story short, his clearing firm was forced to liquidate all of the positions at any price to mitigate the disastrous losses.
Sadly, it wasn’t enough, and everything was wiped out.
Everything…
Not just a drawdown, but 100% of the money.
And to add insult to injury, because of how things were structured, these clients also had an additional bill on top.
Yuk..
Estimates suggest it was close to 30% on top of their investment.
Ouch…
Then he posted this apology video (which went viral) because it was pretty cringey.
So, where is he now?
Well, he has a website and he does mention optionsellers but must have forgotten about the $150m wipeout bit…
“As James’ expertise grew, so did his vision. Recognizing the need for evolution, Liberty Trading transitioned into OptionSellers.com, embodying a refined approach to commodity investment.” – jamescordier.com
So what’s the moral of the story?
Well, there are loads. But the biggest one is this:
Risk management.
Know and understand the risk you are taking for each and every trade.
Did James know and choose to roll the dice anyway? Or was he naive?
Well, no doubt the 2018 spike was unusual, but look at the futures chart going back to 1991.
Was a spike of that magnitude really that unusual?
Not really…
I guess we’ll never know what was going on in his brain.
But I do know I won’t be sticking $250k into his next fund…