James Cordier: Tragedy or Laughingstock? (Part 1)
Posted by Mark on August 13, 2019 at 06:57 | Last modified: March 2, 2019 11:14Today I want to discuss the title of this post.
To give some background, James Cordier and OptionSellers.com director of research Michael Gross co-authored three editions (last in 2014) of The Complete Guide to Options Selling. The book discusses the potential rewards of selling naked options and tells investors they can produce consistent results with only slightly increased risk. Cordier has also advocated the approach in articles published in Futures magazine and Seeking Alpha.
Unfortunately for Cordier and his investors, natural gas experienced a Black Swan event in November 2018 that led to more than complete losses for his 290 clients (totaling over $150,000,000 per one lawyer’s estimate). He published a video apology on YouTube discussing his mistake. The video was taken down soon after, but it was reposted by others. As of this writing, you can do an internet search for “James Cordier nat gas video” to find it.
My initial reaction to the video was horror and sadness. I walk around with constant awareness that I could lose everything on any given day. This is one reason I am so grateful (see first paragraph here) for what I have and why I would be so hesitant to trade other people’s money with some of the same strategies I have employed for myself. This has been discussed (see second paragraph here).
On the flip side, some outspoken commentators have been heavy on criticism in viewing the situation entirely different. Financial parties on Twitter were very “I told you so” about what they called an exceedingly risky option strategy lacking proper hedges to make such a collapse “inevitable.” One macro hedge fund founder blamed Cordier and his investors. He claimed the strategy to be one where you slowly make money until you eventually blow up with the probability of total loss being “fairly significant.” He believes Cordier “took advantage of guys who didn’t know any better.”
Retail investors usually don’t know any better, which is why they hire professional money managers (for better or for worse).
On the Elite Trader investing forum, “Illini Trader” (IT) dissected the day-by-day progression of natural gas (NG) prices and concluded Cordier’s catastrophic loss did not have to be.
IT first claimed communication with Cordier eight years previous while working for a different firm. Cordier then indicated closing positions upon reaching 1x loss (i.e. down the initial credit of the trade).
Fast forwarding to 2018, with NG closing at 4-year highs the week of November 9, at 3.724, IT observed the position was probably around 1x loss. November 12 took NG to 3.935, which certainly would have triggered 1x loss. Even on November 13 with NG closing at 4.072, Cordier had plenty of opportunity to close the position. Holding to the next day when the parabolic move took NG to 4.93 is what sealed his fate:
> He chose to jump in front of a freight train hoping it would stop.
> IF he had only followed his own rules he would still be in business.
I will continue next time.
Comments (1)
He absolutely had time to get out, but even more so, he had the knowledge not to sell calls on nat gas during that time of the year. Based on his own book, and seasonal averages, you expect gas to rise in the fall and perhaps sell calls after it peaks usually around jan-feb (traded gas is a wholesale product not end user). In other words he went against his own teachings, perhaps to make more money, and failed.