James Cordier OptionSellers Blow Up Explained
James Cordier’s hedge fund lost $150m from selling options. His investors received an email stating they had lost all their money and owed more to cover a margin call.
He then recorded a cringe-worthy apology video where he apologized for ten minutes about how bad he felt.
You must learn about the OptionSellers blow up and James Cordier’s mistakes if you trade options to avoid making the same mistakes.
Who is James Cordier?
James Cordier is an ex hedge fund manager who managed around 290 people’s money.
He was known as an options trading master, and many people have purchased his book, The Complete Guide to Option Selling: How Selling Options Can Lead to Stellar Returns in Bull and Bear Markets.
However, his knowledge of options trading didn’t stop him from blowing up his hedge fund.
James Cordier’s net worth was significant until he took too much risk trading options.
Why Did OptionSellers Blow Up?
James Cordier piled the OptionSellers fund into a short call position on natural gas futures and a short put position on crude oil.
He was overleveraging into these positions and taking on a ton of risk.
Additionally, he was not hedging the portfolio with any shares or long calls, meaning the position on natural gas came with unlimited risk potential to the upside.
The chart above displays the weekly natural gas futures chart in late 2018 when the fund blew up.
You can see the monstrous green candles on the right side of the chart, signaling exactly where James Cordier was margin called on natural gas.
The image above shows the weekly chart of crude oil. James Cordier sold puts on oil, and you can see the series of red candles that wrecked his overleveraged position.
Therefore, James Cordier lost money on natural gas and crude oil, betting the exact opposite of what happened.
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OptionSellers Big Mistake: Trading too Large
The biggest mistake any option seller can make is trading too large for your account.
When you sell option premium, you can use a lot of margin since brokers don’t require you to put up a lot of capital to sell options.
James Cordier sold way too many call options than his fund could handle, and when the price of natural gas futures increased massively, he was margin called and lost all of the fund’s money and some.
He also sold many put options on crude oil that went against him and forced him to close the trades out with a negative account balance.
Lessons Learned: Trade Small
The biggest lesson learned from James Cordier is not to overleverage your account. You must understand how notional value works and keep it in check when you sell options. For example, selling a $100 strike put is $10,000 of notional value since it simulates 100 shares.
If you have a $25,000 account and are controlling $100,000 worth of notional value by selling options, you risk blowing up your account. The best way to manage your risk is to keep notional value at a reasonable level and buy options to hedge your short options. For example, if you sell a $100 strike put, consider buying a $90 strike put to limit your risk.
You should also backtest your options strategies to determine the maximum loss potential before using it to trade with real money. You can read my article about the best options backtesting software to see the top backtesting tools, but I highly recommend Option Omega. It allows you to perform 10+ year backtests with 1-minute historical data in minutes, making the process quite efficient.
James Cordier Apology Video
James Cordier of OptionSellers sent his investors an apology video that also went viral online.
Few people feel bad for Cordier since the losses would have been easily avoidable if he didn’t take on so much unnecessary risk.
James Cordier’s net worth was very high until he got margin-called and blew up his hedge fund.
OptionSellers Blow Up | Bottom Line
While you can make a lot of money using margin to trade options, it is a double-edged sword. You can blow up if the market goes against you and your portfolio is not hedged or sized correctly.
Understanding your risk tolerance is crucial to becoming a successful options trader. Regardless, you are bound to blow up if you trade too large for your account.
Therefore, you should always trade small and avoid getting cocky and piling too much risk into a single trade.
Before you go
If you want to keep educating yourself about personal finance, you must check out these posts as well:
What is the Most Successful Options Strategy
Options Trading for Income: The Complete Guide
Mark Minervini’s Trading Strategy: 8 Key Takeaways
The Best Options Trading Books
The Best Laptops and Computers for Trading
How to Get a TradingView Free Trial
