Blowing Up: How This One Fund Blew Up Overnight – And What We Can Learn from It

This is the good old fallacy of not looking at long enough time horizon and estimating information content in recent variance in addition to not setting up a robust strategy.

Usually taking off robustness for small short term profit is not worth it.

The usual thing is if the maximum observed variance vastly exceeds any current trend, you definitely should not gamble in this way as the volatility is high. Complete but easy calculation would allow him that the assumption he made is baseless. (Take a peek at variability in 70s, current blip is way below that.)

As for "black swan" events and general risk bounds, he probably did not gamble with money he couldn't afford to lose. That's not necessarily true for his clients though.

Bankruptcy with limited liability is a valid exit strategy and any investor should be aware of that risk strategy.

Blowing Up: a crappy webserver. Here's a mirror: http://archive.is/ezjyH

Ok, so don't they teach beginning options traders about naked call options??