Short options, LJM, and my lack of interest in a long/short option ratio

I was thinking about a tweet I saw today.  The quote that caught my attention was

"For anyone wondering i finally had a chance to crunch the numbers.... 14.5 short puts for every 1 long puts. $41bn short against $3bn long...No words. 

This was regarding an LJM fund failure due to crushing losses on short options during a vol spike.  I'm sympathetic to the quote and in the context of the tweet he is absolutely correct, but the main thrust of the tweet, the ratio (14.5:1), does not really interest me at all.  Me? I often carry somewhere between zero to six short puts and no long. So what is my ratio? Generally we'd call it "undefined."  So, my risk by that measure is unconscionable. But it's not. That means that what interests me in the quote is the (likely and implied) extreme, unthinking, and probably unsystematic (but I don't really know that) exposure as well as (my guess) a lack of respect for chaos by LJM.
I've been running a short options strategy for years and my multiplicative time-average return can range, depending on what interval is measured, somewhere around 10-20% with moderate vol.  That sounds like a freakin' money machine and in fact if I would scale it I could probably make a lot of money for myself and my family. But I don't. Why?  Abject fear and a healthy respect for chaos as well as a reasoned perspective on strategy- and portfolio-level risk over time.

First of all, there is a strong case for selling options, such as:

• positive risk premium related to short volatility in terms of the relationship between implied and realized vol over the tenure of the trade
• positive expectations due to the time decay; who, really, wants to trade against time?
• positive expectations (in my opinion) due to behavioral quirks: most retail and I'd say no small number of professional managers seem to like lottery-like payoffs and this options proposition is like a lottery in reverse (it's like being the state or a casino rather than a ticket-buyer or bettor). That makes it feel like an open field to those with capital, courage, an appreciation for the inverted asymmetry, and a strong rules-based systematic approach
• positive expectation that comes from depending on not where the market is going to go but where it is not going to go, i.e., it's a slightly higher odds bet and it means I'm already on the tail of a probability distribution that is in my favor.
• tends not to correlate to a meta-portfolio and so is accretive to capital efficiency even with taxes and fees all in.

and there are probably some others.  The basic point here is that contra a "regular" kind of trade, there are some pretty solid reasons to be in a short options trade before I even look at a chart or the newspaper.  I like that. (my trade mentor RS: "stack reasons or reasons before you pull the trigger")

But the reward that arises from the bullets above is not a freebie. The premia extracted are compensation.  We can get all academic with something like the volatility risk premium but in my own non-academic reality the premia are compensation for nothing more than taking on fear and sometimes extreme fear ...as well as a reward for being organized (Let's call all of this a triumph of evidence and systematism over fear and chaos).  That's because this is an upside down kind of trade. Rather than looking for a return:risk of 3:1, with short options its an upside down 1:3 (paid $1 for risking 3 or more) or even 1:infinity. That means that this is not for the faint of heart or the system-less.  But it is profitable.  Since the end-game is "expectancy" over a series of independent trades over time (in other words this is a "system," not a single trade proposition; I don't know why more people don't understand the idea of systems) and since I am "right" 80 or more percent of the time, that means I can profitably absorb the upside down 1:3 or even 1:4 in risk over the long run of a series of sequential independent bets. What I can't do is absorb 1:10 or 1:25, the latter of which once happened to me, by not having rules.  That means risk management and the rules of the system are paramount. 

So that (without looking at the LJM situation in detail) is my guess at what happened: a failure of or lack of a "system." I don't know what really happened but here are some ways for funds and people to fail in this kind of enterprise:

- lack of adequate ex-ante rules for entry and exit and operational indecision in their execution. This is why automation can be a system-trader's best friend
- lack of understanding of probabilistic systems
- lack of appreciation for chaotic systems
- lack of a clear, actionable per-trade absolute risk guideline
- lack of a portfolio-level combined relative risk guideline
- over-riding the rules with behavioral quirks and "intuition"
- in extreme situations: over-trust in orders, brokers, and exchanges (sorry brokers and exchanges)
- lack of awareness of the multiple ways to physically hedge (idk, let's say offsetting positions like credit spreads or strangles or ratio spreads, delta hedging, trading with trends, orders based on underlying, orders based on prem, time decay management, etc ... there are lots of ways)

This is repetitive but the simplest thing I'll go back to is that these short-option things are not stand-alone trades or a premium piggy bank, they are part of a sequential (not always exactly sequential), independent series of bets that are part of a system.  That means that if the odds are stable and if the win rate is stable and if the trade and portfolio rules are followed religiously and if the brokers and exchanges play fairly in extreme situations, the only thing that will take you down is not being able to distinguish between a period of strategy under-performance and a decay of or failure in the nature of the strategy itself. And that is another story altogether...