Rise & Fall of Assets

At one time or another I think any new trader has entertained or possibly investigated the idea of selling naked puts or premium selling. Options on futures are margined under SPAN rules set by exchanges which are volatility based instead of arithmetic like Reg T or equity options. This means you can sell deep OTM puts on ES for a couple hundo in margin. Not bad right? Especially when your hit rate is something like 80-90%. Then it all comes crashing down and your left wondering what the heck happened. Niederhoffer, Leeson, thousands of others were caught sell naked puts of some type. But despite the lessons of history, the real lesson is that, as they said in Bronx Tale: “Nobody cares”. You show a steady consistent return (Madoof ahem..) and the money will come. Risk be damned! Just look at some of the amazing growth rates of Option Selling CTAs and their decline.

Option CTA

For those that don’t know the strategy, here is a quick explanation:

  • CTA: I wanna sell me dem der puts.
  • Trader: Strike, duration, cars? I need a little more info…
  • CTA: Looka here, I done manage $XX MM and I wanna get 5% per month so I can get me a fee and such.
  • Trader: OK, sir. No problem sir, we can help you with that.

Ok that was really poor and I apologize to all readers with southern accents, its not meant as a knock. The operators were much smarter then the above, they lure you in with 0% or low management fee and high performance fees paid monthly. Basically taking YOUR money to play a high probability of win and catastrophic loss game; meaning they win and you lose. Isn’t money management wonderfull!

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~ by largecaptrader on July 8, 2009.

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