Au' contraire. An immediate 5% index move (unhedgable) will cause a 50-80% DD for an aggressive premium collection fund. You're assuming worst case on opex. Unfortunately margins and account balances are in real time. All those 1350 and 1360 puts that are expiring worthless to-morrow provide little solace to those who paid 17 covering shorts from 3. Just to give you an example: In the past month, two of the best know S&P premo sellers are down between 20-30% on what IMO has been a shallow, well behaved break. Even the 27th was only like the 103rd worst one day % drop. It was also "hedgable." IOW's it's not like the market opened 300 lower.
You're talking about downside moves while I was talking about upside moves. Like I said before, since LTCM the professional options traders tend not to sell downside premium because of the perceived imminent risk of an outlier and its devastating results for such a strategy. Your example only demonstrates my point. Also, selling OTM calls is part of mathematical model that establishes the certainty of possible outcomes. That is, the daily price increase has an effect that is offset by time decay and volatility decrease, which leads to constant portfolio appreciation within a pre established risk benefit framework.
so are you saying that LTCM wasnt a S&P premium seller back in the 90s??? and their loss came solely from convergence trades?
Thats a new one to me -- calls only? Ansbacher may do that sometimes, but usually writes both sides. VN, obviously. But there are a dozen or so others -- check Futures magazine over the past 10 years and the pack of the magazine trader profiles -- who write only premium as a strategy and they are selling SP puts -- naked, or strangles and iron condors -- with the ocassional foray into bond futures. I'd be curious to know the names of short call only CTAs. I explored the strategy and can't get much of a return out of it.
Read Lowenstein's book. Pairs trading between 29- and 30-year bonds, foriegn debt, a short squeeze, all sorts of stuff.