Here is our GE trade from Sept. 8. How did we do?

9/8: "The GE October 28 puts have been bought up throughout the day in good sized chunks, with more than 10,000 bought against open interest of 3421. The stock gapped higher this morning and bouncing off of a low for the day of 28.25 before rising to above 29. The buying indicates that traders believe this will return to levels just seen on Friday, as the stock opened that session at 27.49. Implied volatility is up to 32 percent, from below 25 a month ago. Historical volatility is just below at 30, having come down from 35 a month ago. The October 28 put is currently trading for $.88.  This is a cheap shot--and should be sized as such--to take advantage of a return to, or below, the recent lows. "

9/9: "The GE put activity burned bright yesterday as more than 10k of the GE Oct 28 puts were purchased in a strong tape that pressed higher by nearly 300 points. Got a few folks asking about the move in this big blue chip and sure, the potential for a continued decline, as it is right now, makes ya scratch your head in this rapidly swinging tape. These puts are moving, not close to a double, but moving from the low $.80’s to low $1.00 range! Lightening up some of the GE Oct 28 puts(GEWVB) trading $1.06."

9/10: "The GE Oct 28 puts are presently trading as high as $1.30 and curious to see a lack of participation. A quick move lower from the other day and could be an opportunity to consider if GE's weakness will continue or begin to turn… Either way, the stock is rolling back into negative territory and those puts are now trading $1.32, could be an opportunity to lighten up, but wow why this such a struggle into this tape. Lightening up some more of the GE Oct 28 puts(GEWVB) at $1.32 or higher."

9/12: "The GE Oct 28 puts (GEWVB) trading around $2.12. Exiting the balance of the GE Oct 28 puts at $2.12."

Analysis: Even as we were closing out those puts, we had a December put spread that hit on Wednesday, which also proved to be very profitable. GE was above 29 on 9/8 and now sits at 23.96 after hitting a low of 22.16 Tuesday. The October puts are now worth $4.60. Scaling out of positions makes sense from the standpoint of risk management. That being said, if you have enough contracts, and a broker that doesn't hit you with a fat commission with every trade, it can make sense to hold some options when the stock is running your direction.

I don't think I would want to be in the insurance industry these days... Oh, wait, I am.

People buy insurance to transfer their risks, and insurance companies take on those risks to collect premiums--enough so that their real risk will be distributed in a way that any real losses will be covered. They use fancy math and models to determine how to optimize profit and limit losses.

The options market revolves around similar risk transference. Option buyers, especially put buyers, are looking to transfer their risks, and option sellers are willing to take on those risks to collect premiums.

Selling insurance, or options, is a profitable business. Every day, every week, every month you collect premiums. And options are often overpriced--especially if you pay attention to implied volatility data, putting the odds in your favor. You can use fancy models and the "greeks" to determine your risks and probability of profit.

This is all well and good... until bad things happen. Call it a black swan, call it what you want, but things happen in the market that the models and the math do not count on. And they happen far more often then they "should." This puts options sellers and insurance companies out of business. It happens all the time, and it happens to professionals, and as we have seen this week, it happens to big investment banks and insurance companies.

The risk models at work are radically insufficient. And when you are leveraged 33 to 1 (as Bear Stearns was), having faulty risk models is disastrous. The Black Scholes option pricing model is what gives us the greeks and implied volatility. And it is a flawed model that does not take into account the truly radical nature of the markets.

It is no wonder that two of the Nobel Prize-winning authors of the model were later risk managers for Long Term Capital Management. LTCM, of course, was the largest hedge fund blow-up until last year and nearly brought the financial system to its knees. But of course they claimed that the circumstances that brought down LTCM were a once-in-the-lifetime-of-the-universe occurrence. Isn't it odd that the manager of Amaranth, now the largest hedge fund collapse of all time, said the same thing.

What strikes me as very odd is that we did not learn more from LTCM, as we have continued to use the same risk models that now have us in our current crisis. It reminds me why I should really stick to buying options, not selling them. It hurts to lose when you buy an option. But when you sell options and you lose more than you have in your account (it has happened to me), that really hurts.

Why don't we use better models? The answer is mainly because we don't have ones that work efficiently. I still use the Black Scholes model because it is a helpful guide. I spend a lot of time talking about implied volatility and the greeks. But I realize that the model is flawed--sometimes fatally--and base my risks on real worst case scenarios, not probable outcomes.