By Bob Fitzsimmons, Wedbush Executive Vice President
The events in the US natural gas markets on November 20th epitomize the Keynes’ maxim, “The market can remain irrational much longer than you can remain solvent!”
Watching the surreal video of a CTA who lost all of his clients’ money (and then some) only several months after the February 5th and 6th “Volmageddon” is difficult to countenance. Listening to him attribute these losses to a “rogue wave” is nothing more than an expedient euphemism for poor money and risk management.
Contrary to the manager’s assertion that one should be able to sleep at night with a naked, short –options position, his clients have unfortunately learned the perils of his strategy.
The allure of theta decay is quickly offset by the powerful and accelerating force of negative convexity.
At Wedbush we firmly believe that:
- Selling options short without any corresponding hedge is extremely dangerous
- You must understand the risks associated with any trading strategy
- The capitalization of your clearing firm is extremely important