I was responding to the example at hand. The OP was not dynamically hedging. The discussion was centered primarily around soft deltas. Obviously as I pointed out humorously (you obviously didn't catch this post on a similar thread) one can lose all sorts of money once they begin trying to hedge shit 7 ways from Sunday. But bringing that up here didn't seem relevant to the topic at hand.
Shooter, I think it varies by traders style. Some guys are very astute at position sizing and adding to a good winner instead of giving in to the urge to sell and take a quick profit. Some guys simply have more patience, so they don't add size but they hold it longer. Some guys are really good at assessing opportunity. They just for some reason feel better about trade XYZ and are going in with more conviction. If I had to point to a trader here on ET to study that behavior, it would be Rearden Metal. The hardest part is really the psychological part. Most guys have very high levels of anxiety holding size or holding a winner for long periods of time. The truly great ones can do both. Any schmuck can take a tick out of the market. Few can truly fully capitalize on great trades. Read "The Big Short" about guys with macro views who were NOT looking to make a tick and had the courage of their convictions to ride out their trades to their proper fulfillment. The Chapter on Dr. Bury was alone worth the price of the book.
Yes..however it is much harder when it is a slow and tedious loss due to the slow crawl. Somehow it is easier to close out a position when it turns against you FAST. When its a slow bleed much harder as you keep rationalizing it will change.
I can't remember exactly, maybe 10 to 15 contracts on a strike. His overnight haircut was only about 2k or 3k. And as my memory comes back on this, I think the flash crash we were at around 1200 right? I think he was actually selling the 700 strikes, maybe 750's. So he was almost 50% out of the money where he was selling! You see when you hear people say traders need to have a very good math background to trade and often times people blow that off, this is precisely why one needs to be really good with numbers to truly understand the risks of this job.
Yes, but that is your own demon you have to deal with. This is true of any position really. You could be long shares of a stock that trickle down pennies a day and never sell. As a good card player says, always know your outs. But yes, you are right in that the psychology is indeed different.
" http://en.wikipedia.org/wiki/The_Big_Short The book also highlights some people involved in the biggest losses created by the market crash: like Merrill's $300 million mezzanine CDO manager Wing Chau; Howie Hubler, infamously known as the person who lost $9 billion in one trade, the largest single loss in history;[2] and Joseph Cassano's AIG Financial Products, which suffered over $99 billion in losses.[3] " Professional Traders! :
I am not disputing your main point, which is (my understanding) that if you keep selling naked risk premium it will eventually catch up to you. It's true everywhere, in vol as well as in rates or credit. The market can and will stay irrational longer then you can stay solvent. This, obviously, does not mean that you should never sell overpriced risk premiums. What it does mean that either you should sell them as part of some sort of relative value strategy (my preferred approach) or make sure that you can withstand the pain.