Many of us have already heard the news regarding OptionSellers.com, a wealth management firm located in Tampa, FL, that lost more than $150M in customer assets in a natural gas trade. The trade in question occurred in November 2018, and involved being short call options on natural gas, and in a matter of a few days the natural gas market went parabolic (i.e. soared higher almost ~40%) resulting in clients losing their entire investment amount. In some cases, clients lost more than the value of their accounts and are now on the hook to pay for the deficit amount. INTL FC Stone, an FCM that aiSource uses to house some of their client accounts, was the FCM of choice for OptionSellers.com and where all their clients were housed. INTL FC Stone now faces an uphill battle collecting debits from some clients and dealing with outrage and legal battles with others. Optionsellers.com is likely in a similar boat. While the direct impact of the blowup is limited to a few hundred clients, the indirect impact likely reaches thousands of people. The goal of this blog post is to show just how far these catastrophes can reach.
Feb 2019 Natural Gas Chart that shows the parabolic move in November 2018
Advisory Firms and Introducing Brokers Lost Clients
While the only direct companies that handled OptionSellers.com accounts were INTL FC Stone and OptionSellers.com itself, there were instances in which certain investors were clients of both OptionSellers.com and other introducing brokers. For example, aiSource had a couple clients that invested in a diversified basket of CTAs, but ALSO had direct investments with OptionSellers.com. When these clients realized what had happened to their OptionSellers.com accounts, they notified aiSource that they had to liquidate their managed futures portfolios in order to cover the deficits in their other account. As a result, aiSource lost clients, as many other competitors likely did, as well.
New IRA Account Restrictions and Barriers to Entry at INTL FC Stone
While no details have been finalized, we have been notified that IRA accounts at FC Stone will require further requirements than what is traditionally required of an IRA account. The reason for this is because many OptionSellers.com clients had invested with them through retirement accounts. Speculation is that FC Stone will require a minimum account size and impose higher margin requirements than exchange minimum margins in order to facilitate retirement accounts. While it is completely understandable why FC Stone is enacting these new rules, this is another example of how an investor that had nothing to do with OptionSellers.com will now have to deal with more hurdles if they choose to clear their retirement account at FC Stone.
Investors Lose Confidence in the Futures Industry and CTAs
OptionSellers.com was registered with the National Futures Association (NFA) as a commodity trading advisor (CTA), but they did not operate like a traditional CTA. While traditional CTAs charge clients an annual management fee and an incentive fee (a share of profits generated), OptionSellers.com was charging clients a commission on a per trade basis. While charging commissions as a means of compensation is rare for CTAs, it is allowed by regulators. Therefore, what OptionSellers.com was doing was completely “by the books,” but still very unorthodox when compared to most of the CTA universe. Due to OptionSellers.com being registered as a CTA, it’s likely that prospective managed futures investors will lump them in with the rest of the CTA space and have a negative view on the entire managed future asset class.
Given OptionSellers.com’s experience and reputation, no one could have predicted that such a loss event would occur. Nonetheless, it’s important for all investors to appropriately vet all investment strategies, especially, option selling strategies. aiSource and its comeptitors work day and night to conduct research and due diligence on all futures specific investment managers, and it behooves all clients to consult one of us prior to making any investment decisions.