Steve Fossett, the adventurer and options firm owner, used this strategy (net premium seller in the indexes), and blew up his trading firm. But he recovered from it.
What exactly do you mean by "net premium seller"? You can be a seller of risk premium and yet be long premium (or vice versa)/
Let me make a couple of points: 1. Put Master sells naked puts just as this lady does now. 2. I sell spreads which she says is what she used to do. i think the spreads are safer but (I think) she likes the higher premium on the naked short puts. As she says... my risk is pre-determined, hers and PM's is not. 3. She says she risks 50% of her capital which means she is sacrificing about half of her potential in the interest of safety. I use a similar percentage... sometimes a little more, sometimes a little less. (Since she is doing trades with an open ended risk she doesn't say how she calculates that... but I think I know.) 4. Both PM and I do individual stocks not indices. This is a big difference. 5. I try to concentrate on writing put spreads on stocks that are 'disaster resistant' . I maintain a stable of such stocks. e.g. http://finance.yahoo.com/q/bc?t=5y&s=CWT&l=on&z=l&q=l&c=TLT&ql=1&c=^GSPC If the market tanks CWT and TLT won't... nor will the other 20 stocks in my list. Actually from past behavior Treasuries (TLT) will go up if the stock market crashes. 8. I write trades that are calculated to yield about 15% annualized... she uses the exact same number. With 50% deployment she should be making 7.5% annualized. 7. I also try to do a mixture of both short and long trades. e.g. at Jan expiration I will have a bear call spread on BBY expire. I also use bear put spreads which have much much higher potential yields in a downturn (but which are debit spreads rather than credit spreads). Both of these would tend to balance out losses in the event of a market disaster. These are not solely 'hedges' but profitable trades in their own right. 8. Like her I have done some spreads on volatility as a hedge but have stopped doing that because it simply introduces another uncontrolled variable and I frankly can't calculate the right size hedge. There are other ways of doing the same thing. 9. This is not to say I would not be hurt by a deep market dive, but I believe I am ready for such an eventuality.
Ratio back spread you are net short in dollars but still long convexity.. Net seller in dollars or ... a net seller of convexity Need something uncorrelated with more vol then TLT or just sell a lot more to get an equivalent vol
Having more longs than shorts on the put side (ratio), especially a few the next month out, helps tremendously against large vol spikes in market downturns. A vertical spread is hedged by nature of course, but if there is a market crash and you have a standard short vertical spread getting annihilated, you'll be screwed anyways assuming you've risked much of your capital to that one position. Having more longs than shorts on the put side really reduces the risk of being wiped out.