Nearly ALL of the credit spreads are paired with a companion to form an IC within a short amount of time. So if the PUT spread takes a serious hit, the CALL spread will be at or near its maximum return. The market "popping back up" is not part of the strategy. If the capital at risk is showing a 20% loss, I bail. I do not adjust. I do not pray. I do not hope. I bail. A stop loss is still effective for those "gone fishing." There may be considerable slippage because this is a leveraged trade and moves faster than the market. Nonetheless, stops do work. It is not necessarily so. There are techniques that make this scenario far less common as the so-called experts would have you believe.
Regardless of your recent post(s). You haven't answered fundamental questions. Do we need a treadmill to get to your level?
I was not walking on the treadmill for an extended period because of an ankle injury (falling on ice). I still stood at my desk, but did not have the treadmill running. There was no detectable difference in trading results.
I never said they were a winning strategy per se. Only that that example and some others from real life, like pretty much all the action in the fall of '08, showed the dangers of IC's. No options strategy by itself has a positive expectation, obviously. Now, the reason I say that IC's depend on BS being correct is simple: it's a strategy that depends on a world where the risk and the reward move along a smooth curve. Any discontinuity upsets the strategy. Discontinuities are not allowed for in BS, or any mathematical model. You need a model to generate the greeks, like I said, and that's useful info to have. Credit spreads use the model as the basis for a strategy though, without really understanding what is going on in the underlying beyond its volatility. That volatility determines the probabilities, which determine, for an IC trader, which strikes he uses. It's a direct line. You have to, because otherwise you won't collect enough premium to make it worth doing even for the months where it works well.
BTW, just to explain the Lehman trade: I traded Lehman regularly. It was my bread and butter at the time. The week before earnings I looked at the options, and thought the IV was way too low given what was going on in Bear, and since Lehman was in the same industry, I figured there'd be some sort of big surprise on earnings day (given the pessimistic background, a good one would have been just as surprising as a really awful one), and that that surprise wasn't being priced in, for whatever reason. The Bear debacle over that weekend made the earnings report an anticlimax of course, but the reasoning was based on the idea that the vol was not matching the real world probabilities. That's a good reason to do a strangle, I think. IC's assume, because they have to assume, that those vols are a reasonable reflection of reality. Most of the time they are, but sometimes they're not.
So what you meant to say (and should have said) is that trading iron condors requires being able to quantify the probability of large moves in the underlying price. I agree with that, but obviously there are very many ways to model price action other than the lognormal distribution used by BS. Sharp discontinuities in price can certainly wipe out iron condors, but they can wipe out most other types of leveraged trades as well -- many a futures trader has been blown up by such moves.
I've been thinking and thinking about this, and I don't think you get the point: what you're saying is kind of impossible. The number of outliers, let's call them, varies wildly over time. You would have had lots in the 72-74 bear, which was actually a peak from a series that started back in the mid-sixties, then suddenly for a long time only a very few. Starting in August 1982 lots of up action that would have killed you on the call side. Then nice and trending, mostly. Then in 1987, lots again. Then again in 1989 (United Air mini-crash) 1990 (Iraq invades Kuwait) then in the late nineties they start coming one after the other (the Tequila Mexican peso crisis, the Asian currency crisis, the Russian default and LTCM, and then the dot com bust), then a period of calm where the VIX practically goes to single digits, and then in 2007 the crisis starts (the VIX shot way up at the end of Feb, which looking back is when the fun started) and you continue with that until the spring of 2009, when, by the way, you would have gotten murdered on the call rather than the put side of your IC's. The variation of these over a long period of market history is pretty severe. We're in a period of relative calm now. (and guess what? We've got someone boasting about his credit spread returns.) For how long? No one knows. Let's just say that the frequency and the severity of discontinuities is itself discontinuous. Therein lies the problem.
Garbage credit spread blowouts (peak to trough) 7/07... SPX loses 185 points in four weeks 10/07... SPX loses 170 points in six weeks 12/07... SPX loses 250+ points in six weeks Less than six consecutive months in 2007. 2008 was absolutely CATASTROPHIC for sellers of credit spreads.
I've lurked on here for a while. I've read the 2000 page thread OptionsCoach had, on credit spreads. That was quite a read. Forget all the talk on negative expectancy, having 'no edge', the greeks, delta-neutral, gamma risk, risking $10 to make $1, horrible r/r... that '2008 was a horrible year for spreads' .... on and on. How do you counter the RESULTS that these people were able to produce (as an example): http://www.monthlycashthruoptions.com/ReturnOnInvestment.htm Their results go back to 2006. They survived 2008. They've been net positive, year after year. Look at their trades. Disclaimer: I'm not a member of their service... but you can't argue with their results, can you? There are other 'garbage' credit services out there... but not these people. Howard may be an older man... and an easy target (I respect my elders)... but how do you argue with real results, real money, real risk management - from people who have actually traded credit spreads, successfully, in good and bad times?
"Asked and answered, counselor"... Everyone on the thread has advised Howard about blowout risks. He's willing to take the chance, so G-d bless. He's not a young guy, and he may well dodge the black swan till his last days, and leave a nice sum to his heirs and assigns.