+1 Nine pages of pointless arguing to debate something that should be obvious to any real trader. There is nothing to prevent a 10% gap down and the VIX going to 150. It may never happen, but not considering that risk in your strategy makes you an insurance salesman with inadequate capital reserves, not a trader.
Whatever helps you get to sleep at night... If you are so sure then why are you wasting time posting here, when you can be out there selling far OTM puts and reaping huge profits!?
<i>"People do this all the time and make a lot of profits. A few are crushed, but tell me, in what aspect of trading is everyone profitable? Generaly, in all trading, and in life, you will be screwed if you don't manage properly. Not just selling naked put options."</i> I personally traded this exact-same approach of short SPX options and long ES futures to off-set as needed back in 2002 ~ 2003. Let me hit a few of the high notes for ya, speaking from personal experience. I was playing that game before the current traders OP mentioned ever dreamt of this approach. The problem doesn't lie in six-sigma events. The real problem comes during extreme sideways volatility. That is the bane of short option players. Those deep out-money puts gain value as the market falls. VIX rises, extrinsic (juice) rises and your shorts take heat. If you short the SPX 1150 strike in Sep, Oct or whatever back-month contracts chosen, the index does not have to reach 1150 by expiry to cause you pain. It only needs to drop from present 1260s to 1200 and you are in big trouble. Value of those shorts would at least double, possibly triple depending on time left and other factors to keep this simple. * Hedging with futures is your next challenge. Once the futures position is opened, your net-loss is locked in IF you either ride both options and futures to expiry OR close out both sides when possible. Decisions to roll out new plays, hold and take the loss or some combination of both are dependent on market action at the time. While the overnight session exposure exists, there is a slim chance your ES hedge stop-market order will slip dramatically. It is possible for a huge loss to be experienced, but that's true in trading period. If the people trading this approach have deep pockets and only work shallow portions of their capital, they will be fine. The temptation to leverage up kills most people who play. False sense of security (greed in another form) has them pressing the pedal into next unknown adverse event. Anyone enjoying +100% annual gains is by that definition grossly overexposed. That approach can be good for +10% to +30% annual with a high degree of success... capital managed properly. I can tell you for an absolute certainty that 100% annual gains = too much exposure on contracts for disaster OR string of choppy losses. It would take a modest pdf book to explain all parameters involved here. I know, because I wrote one in 2002 and marketed it. A few traders who bought the program = concept have gone on to make solid but modest gains every year. It requires every bit of patience, discipline and fascist money management as any option-spread strategy does. In essence it is merely legging into cross-market credit spreads as price moves against you. atticus has forgotten more than most people in ET will ever know about this subject. I also know the parameters inside-out myself. Trust us when we tell you that 100% annual gains will end in Neiderhoffer results, 100% certainty. Gearing it towards 10% to 30% annual gains with sufficient capital is another story.
There was an group of traders who were short index deltas into the crash via short straddles and long flies. You can imagine what happened when they woke up on Monday to a position long 6-figures in delta and vol +4000bps. They blew out spectacularly. This is a group that made >$10MM a year for a decade and lost it all.
<i>"This is a group that made >$10MM a year for a decade and lost it all."</i> short options = inverse risk/reward ratios are much like handling dangerous animals for a living. There are professionals who work with lions, tigers, bears, elephants, etc and have avoided injury for decades. But the trainer must be vigilant of risk at all times, fixated on controlling risk without ever letting guard down. One instance can change everything in an instant. Permanently.
From his website: Is this a change? I thought he used to just sell the puts. IIRC he took a severe hit when the market tanked recently. Also, 'naked' put = covered call is still slightly less risky than naked stock.
Yup, they're all idiots. Just go and take their money, all these simpletons are giving it away for free. Just gotta have the balls to hit their OTM bids until they're all gone. And then you blow up.