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Founder of '' Promoted Naked Options Selling, Firm Now Bankrupt

Could this have been avoided?

James Cordier, founder and president of ‘’ explained in an interview that “our goal is to take an aggressive vehicle and manage it conservatively.” Unfortunately for many clients who have now received margin calls (requirements to deposit more cash) and have a debit on their account, Cordier’s approach was anything but conservative.

The firm's president and head trader, James Cordier, apologizing to his 'family' of clients in a YouTube video

The firm's president and head trader, James Cordier, apologizing to his 'family' of clients in a YouTube video

Options contracts which are already challenging enough to the average investor, will now have an increasingly negative reputation from Cordier’s incompetence. However, when we dissect and analyze the strategy that Cordier was using, we find that not only was his approach inherently risky, we also find that this was avoidable altogether.

On November 15, 2018, ‘’ notified its investors in an email entitled “Catastrophic Loss Event” that it not only lost all their money, but many investors also had a debit to their account and owed the broker money for margin calls.

I am writing to give you an update on the situation here with your account.

We have spent the week unwinding our short natural gas call position as expediently as possible.

Today which was to be the final day of liquidation, the market flared as prices appear to have been caught in a "short squeeze."

The speed at which it took place is truly beyond anything I have seen in my career. It overran our risk control systems and left us at the mercy of the market.

In short, it was a rogue wave and it overwhelmed us.

Unfortunately, this has resulted in a catastrophic loss.

Our clearing firm, FC Stone now requires us to liquidate all positions. We hoped to have this done today. If not, it will be completed tomorrow.

Your account could potentially be facing a debit balance as of tomorrow. will be processing fee credits over the course of the coming days to help alleviate debit balances. What these will be will be determined after all positions are cleared.

This has in effect, crippled the firm. At this point, our brokers at FC Stone have been assisting us in liquidation.

Our offices will remain open and we will all still be here to answer your questions and process account closings. We will do everything in our power to ease what discomfort we can.

I am truly sorry this has happened.

I will be updating you again via memo in 24 hours.

Regards, was short puts on crude oil and short calls on natural gas commodities via naked options positions. Options are said to be considered naked if they are unhedged. Not only were they incorrect on direction of both commodities, they were positioned via one of the most risky vehicles possible.

The strategy followed entails someone selling options and collecting a premium. If the underlying futures price doesn’t move that much, the options expire worthless and the seller collects the full premium. But if the futures price moves to the point where those options are in the money, the seller can face costly losses, and potentially margin calls.

This graphic gives context to the surge in volatility that ‘’ experienced.

This graphic gives context to the surge in volatility that ‘’ experienced.

When there weren’t enough assets in some of the accounts of a certain type to cover short naked calls, FCStone (the broker utilized) borrowed on margin against their clients’ accounts to cover the rapid losses. This caused them to not only lose 100 percent of their account values, but now they also owe FCStone for the margin that was extended. Jason T. Albin, a lawyer at ChapmanAlbin LLC, estimates losses from the failure of the fund could exceed $150 million.

After months of relatively subdued price action, volatility in U.S. natural gas futures returned with a vengeance last week, surging as much as 20 percent on Nov. 14 for their biggest intraday gain since 2010. The price swings in gas, as well as in oil, were a "rogue wave" that "likely cost me my hedge fund," Cordier said in a YouTube apology last week.

Unfortunately for Cordier’s clients, this (selling naked options with no protection) is not a conservative approach to trading options, nor is it an appropriate manner in which to handle investment funds. Collecting premium via options selling is a great strategy- however when done via naked positions, it only takes one black-swan event to wipe out an entire portfolio. As proven in the last couple of weeks, being in a naked short position is a reckless way to manage clients money.

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