I admit it, I've been wondering, too. I think even more (potentially) risky than iron condors... are the huge amount of retail guys who've been piling into VIX futures recently. I've heard from, I don't even know how many people, that shorting VIX (or more likely VXX) is a sure thing. I don't think these guys have really been hurt yet, because they just "hang on" and then things (so far) normalize . But I do strongly suspect that equity index volatility has become overly cheap, making it even MORE dangerous to sell options.
Anyone selling OTM index iron condors would most likely have a max loss at this point and would just be sitting at home staring at their screen, rocking back in forth in their chair, sweating through their shirt and praying for a rally to get lucky enough so the market gets back above their short strike.
I've had some tough months. I just closed my first year and I was only up 35% in trading credit spreads. My strategy undergoes continuous improvement. Learning to take advantage of recent volatility changes. Learning when to stand aside. We'll see.
Price action in the past two weeks does bring myself back to painful times, so I can completely commiserate with those premium sellers who are now in a fetal position. I tend to agree with opt789 that although my friends are keen to believe I am an optimist, I am well aware of the behavior of premium sellers. Nearly all are in a max loss position because as they build their positions, their short strikes often sit at a .05 to .10 delta at the point furthest out because there is not any meaningful premium to be received past this point (you are already looking at a 20 to 1 risk reward ratio!). And in every time interval, it is a near certainty that those who were short gamma were completely and utterly annihilated in the past few days. Most premium sellers are not unlike those who behave in other situations where group dynamics prevail... in other words, as a herd, they likely leveraged up on their losses by employing a variation of the Martingale Strategy. Thus, the likely situation is far worse than a "max loss" scenario. Rather, what is more likely is that they picked up deltas in desperation as they felt they have "Crossed the Rubicon". As readers are familiar, the Rubicon is a shallow river in northeastern Italy, about 80 kilometres long, running from the Apennine Mountains to the Adriatic Sea through the southern Emilia-Romagna region. Why I am bringing this to attention is regarding Julius Caesar's army's crossing of the river in 49 BC. Essentially, this action refers to going past the point of no return. In English vernacular, gamblers often refer to this stage when they have so much invested, they double down, or worse, put their wife's wedding ring onto the poker table as they mumble "Call" at the end of the line. They have lost so much that the pain of such a loss is so unbearable it demands a final loud thunderous nail in the coffin. The gambler in all likelihood will go "all in" and far more in order to chase the dream that if Destiny will extend her hand. As we have seen, it did not happen on a day like today. Even should the markets rally magnificently tomorrow... and they will someday, the premium seller of today has been completely annihilated. His capital with which to sell premium is lost. There will be a new crop of premium sellers to emerge who will play this dance yet again... until the next tidal wave crashes ashore. I wish that events such as that which unfolded in the past two weeks would not repeat, but they are as certain as Sylvester Stallone's best movie ever will remain Rocky I. I have been contacted by many friends both here and elsewhere who said, "Thoreau, you were right. Thanks because I listened to you and did not lose the farm in the past two weeks." I am deeply humbled by those complements, because I endeavored to ameliorate some of the labors that new traders would strain against. Since I have decades of experience selling premium, I wished to point to a statistical truth that keeping your money within the parameters of this strategy is as difficult as dating a Hollywood platinum blond B-actress and hoping she will stay faithful to you, respect you, and do the household chores delicately. I hope that the lessons of the past two weeks will be ingrained that while it seems easy to make money selling premium, in the long run, it is da*m near impossible to keep it. (As an aside, I am not implying that trader who are short gamma will become lifelong losers in trading. I am not making that exhortation. I am stating though that a simple formula where you sell premium without your being skilled at predicting volatility or predicting direction will sooner or later vaporize your capital.) (Finally, I have still many contacts with some of the big option houses at the CBOE and the CME, and they confirmed to me my suspicions that almost all of the premium sellers went "all in" before today's price action 8/4/2011, and are sitting at max loss on their spreads. What one of my contacts told me was that because the customers' accounts are down 99%, they barely had enough to sell any more premium spreads, so they reverted to buying up DOTM weekly calls on the indexes outright! Even if we have a 400 point rally in the Dow tomorrow, they will be lucky if those calls even end up in the money by one penny. And even if such a scenario were to unfold, the gain would make up only about 5% of their equity losses)
Congratulations Harold on your 35% for the year. Since the NEW MARKET WIZARDS books state that 40% capital return a year is enough to get you into their records. You are in rarified territory with 35% return for one year. I will pass on a tip to you. There is a PPO indicator, that will keep you out of IRON CONDORS and BEAR PUT CREDIT SPREADS in risky times. You mentioned standing back and being more discretionary. These PPO averages when going up, tend to level out, into a horizontal direction as they come closer and closer together, you are getting riskier and riskier. This is time, to NOT do the Iron Condors, or BEAR PUT Credit Spreads and just stick to Bull Call credit spreads. Take a look at it, you may want to use it. I have found LONG STRADDLE spreads seem to work reliably at the 3 month mark. They pay roughly the same, or better than credit spreads without the risks. Less capital needed also. The only fault I found with a mechanical system was that I could not tolerate the long periods of tight congestion. It didn´t hurt the spreads money wise, but certainly hurt my patience. Sitting on them for 3 to 4 weeks is not a happy situation. In the QQQ you need movement of 5 strikes to get a profit. My last spread was four weeks old and finally made a profit in the breakout from congestion. It had been moving between 3 and 4 strikes up and down. Since it was placed in the middle of the range, it NEVER would clear off the books. I´ve thought of tweaking the mechanical system. Perhaps going to placing a straddle every second strike or third strike or something. Right now I am going to try a new method I have devised. I´m looking for bigger and faster returns. More risk agreed, but nevertheless, here we go.
The Thursday drop, barely registered in the QQQ?? It is just an ordinary monthly bar on the chart, a normal correction, nothing more. unless it takes down the DOW 10% doesn´t seem like much?