A few simple ways of losing your shirt. This being options, you could probably invent some very advanced ways of winding up busted & disgusted:
1. Selling naked options. Good way to actually be naked, homeless, etc.
2. Selling too aggressively way OTM options in a condor, and then freezing like a deer in the headlights when one of the legs start deteriorating rapidly and you can't bring yourself to close the position and limit your losses because you went for a year, or two or three, calmly collecting the premium without incident, and you really don't know what to do when suddenly you might actually have to trade your way out of trouble.
3. Thinking, re number 2, that "adjustments", the most common of which is selling some more on the side that's not deteriorating, will keep you from losing said shirt. Generally speaking, the sales won't bring in nearly enough to keep your shirt on your back if things continue to get materially worse. Even worse, the market could reverse, and you wind up now losing on the side you thought you'd just collect some more premium on, and so you freeze like a deer in the headlights anyway.
Selling options is extremely dangerous, no matter what. If you see a minus sign in the gamma column, be afraid, and be ready to ruthlessly limit your losses when things start going against you. You have to have a trading plan ahead of time for when things go too far against you. You should also have calculated ahead of time the theoretical max profit, theoretical ROI (based on margin needed to hold the position, NOT on the value of the options in the sale/spread), theoretical max loss, and max loss you are willing to take before you get out.
Back testing against the fall of 2008 is probably a good idea. Also against the spring of 2009, when sold calls would have got you into deep trouble, rather than the more usual and more usually hedged-against sold puts. The market can be irrational in both directions. Don't believe what you see in the skew. The skew is just a measure of fear, and is therefore irrational. Just because someone else got bit in the ass by puts doesn't mean you won't get bit hard from the call side.
