How to Lose 93% in Five Easy Months

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One year ago, March 2012, people were flying to Los Angeles and gearing up for an investor conference dedicated to one and only one company: Apple. That's right; the entire conference wasn't just about trading stocks; it was about trading AAPL. (I was going to show you the site, but the URL now is dead and parked, although their Twitter feed – dormant for the past nine months – is still viewable).

It's kind of remarkable that so many indexes have made lifetime highs recently including, of course, the Dow 30 today, without Apple's participation. AAPL has fallen 40% from its peak, but in spite of this, the once-largest company in the world having this kind of collapse, the rest of the market has merrily churned higher.

So late last night, as I was thumbing through Zyte, I was captivated by an article I read about how one
0305-zaky young man garnered quite a lot of fame by being an Apple soothsayer (and, no, it's not the long-haired chap). His name is Andy Zaky, and he had an amazing penchant for predicting Apple's earnings and price direction but, unfortunately, his clairvoyance seems to have only been effective when Apple was climbing steadily and relentlessly. As reported in Fortune magazine:

As Apple's share price climbed and Zaky's fame spread, investors clamored to get in. In June 2012 he opened his newsletter up to a flood of new subscribers, charging the members of this group $200 a month. At its peak, Bullish Cross Pro had 700 subscribers and a lively bulletin board where Zaky would often field more than 500 comments and questions a day.

Andy Zaky's web site is still up, although it's not taking any more subscribers. Its tag line is, inscrutably, "The Power of Compounded Returns in Holistic Quantitative Modeling"

Besides having a fantastic cash cow by way of the aforementioned newsletter, he also had enough wealthy investors interested in him running their money that he put together a fund with over 10 million dollars in assets whose sole purpose in life was trading Apple profitably. His track record seems to have peaked almost to the day that Apple's price did, and then – thanks to some aggressive options trades, which seem to have become more aggressive as the situation become more desperate – he had a total wipe-out. His email to partners is recounted in part:

"Dear Limited Partner – It is with extraordinary regret that I must inform you that during this very dramatic period, the fund has sustained very heavy and largely irreversible losses… At this point, it makes very little sense for anyone to make a redemption given that the fund's liabilities are greater than the fund's capital balance."

Viewing this chart illustrates succinctly how rapidly things fell apart. As I mentioned, the inflection point appears to have been Apple's own $700+ peak.

Fortune continues:

An investor who spoke off the record because he is bound by a nondisclosure agreement, describes how the fund missed both of Apple's big 2012 rallies — in April when it hit $644 and in September when it hit $705. Zaky lost nearly nearly 50% of the fund's capital in one month (March) by buying bearish put spreads just before the stock rose 10%. The fund also managed to get crushed when the stock went down. In May, when the stock fell nearly 100 points, Zaky had bet heavily on bullish calls spreads.

Zaky's web site evidently has some kind of 2013-2014 "recovery plan", but when you're down over 90%, it's probably time to just call it a day. The recovery plan isn't viewable since it is behind a pay wall.

Let me be clear that this isn't a "ha-ha/snarky" post. I feel really bad for Mr. Zaky. I know from personal experience what it's like to feel on top of the world and decide it would be a great time to start a hedge fund. (Although, happily, my experience, while challenging, has been nothing like the above). It simply illustrates how options leverage can be really devastating and how, when a trader is feeling increasingly strained and desperate, he can lose his moorings and take risks that, in retrospect, would be pretty clearly imprudent for the long haul.