Yes, this story made me cringe really hard as I was reading it last evening. First off, if the reporter just bothered to speak with
only one person who ever traded derivatives, she would have learned this was a complete hoax. Simply put, even if the kid started with $1m and ended up with say $60m after two years (being generous all around given the context), that would still amount to 6,000% return. Here is why that couldn't happen -
He made directional outright bets. In other words, say he bought call options betting for the price of the underlying security to go up. This is akin to buying underlying security with massive leverage. If the bet goes your way, you could make a massive return (for example, in Oct '05, I made ~1,000% one-day return on a very small amount buying Google out of the money calls expiring the next day and selling them in the money after stock picked up following earnings report). This is an incredibly dumb strategy and it is completely unscalable to the figures quoted in the article. First, public/listed options are incredibly illiquid in most stocks/securities, and particularly at strikes that could yield this return. This would limit him to making really small bets. Second, you would need a catalyst for a significant price move, which doesn't come too often, so most of the time you would just bleed your option time-value ("theta decay"). Finally, and most importantly, no one is lucky 100% of the time and this type of directional strategy is sure to backfire on you and cost you ~100% of principal (trust me, been there, done that)
He traded volatility. This is effectively a hedge fund strategy, where you buy the option and short the delta of the option in underlying security ("delta hedging"). The hedge gives you protection against the price moves in the underlying and you effectively make money for small moves in the security, regardless of whether it goes up or down (due to "convexity"). Most of the time, you earn pennies on the dollar as the price fluctuates a bit and you trade your delta, and perhaps some of the time you make a bit more if the price moves a lot ("gamma event"). Now, here is the kicker - this is not fool proof either. The strategy trades the risk in the price of the underlying security to the risk in volatility - in other words, if you buy volatility high and sell low, you will still lose money. Most listed options have notoriously bad bid/ask volatility spreads and retail investor would unlikely make any money consistently and reliably enough following this strategy. Needless to say - no way to scale it to the numbers quoted in the article using listed options. Hedge funds and derivative desks at banks mostly trade in OTC (Over The Counter) options which are bespoke bilateral contracts with a ton of protective provisions (averaging periods, stock borrow protection, illiquidity protection, etc) and they still have to take a view on volatility and they do get it wrong sometimes. Even for professionals who are wicked smart and do this day in and day out, the only reliable way to make money is to buy volatility on the cheap in a special situation.
There are a few other strategies that come to mind (e.g. Black Swan) but there has been either no catalyst to make it work or they would be inaccessible to a high school kid from Queens.
The second part that really made me cringe were all the negative references to SV by the kids and by the reporter in her subsequent Tweets. Reality of the situation is that, whatever you may think about early stage bubble in SV, SV tech companies actually create real value, have actual products and serve actual customers/users.
Finally, what is sad about all this is that Mohammed appears to be a smart talented kid and I can't help but think he tainted his prospects quite a bit with this debacle. On the other hand, all this makes a hell of a "what I learned from a failure" college essay.