Andy:
I'm sure your right! But, here's the thing. If there is a black swan event, I may not have seen it coming and then I'm left with my bull puts, which will probably be ITM. Further the SPX may be well below the long put with minimal chance to have my bull put get back to OTM. This can all happen in the matter of hours. Although I've jumped in the boat with Coach on buying the May VIX as "insurance", I'm not sure that will work. So, in short, the black swan could wipe out all my bull put margin in a matter of hours (overnight) without me able to do anything.
However, on the call side, I should be able to see it coming because the moves really aren't as dramatic.
Strong moves up and down to me are like natural catastrophes. But the black swan is like an earthquake; you don't know it is coming and it is extremely severe. A strong move up, however, is at best like a hurricane; I should be able to see it coming and adjust or get out of the way for well less than maximum loss, assuming good risk management.
Let me ask you, if a dirty bomb goes off tonight and the market drops 10% overnight (because downtown LA is pretty much uninhabitable), what would happen to any bull puts you have. Even our FOTM bull puts are seldom, if ever, 10% removed from the SPX price. People will argue that we've not seen a 10% drop. I counter with, except for 9/11 we've never really seen foreign terrorism on our soil. Eventually, the technology these terrorists employ will get more sophisticated, which probably involves the "R" word (radiation).
Also don't forget, I took a huge loss last summer. I can't afford to let that happen again or I'm out of the game. Maybe once I've recovered those losses and esp. if we come up with better black swan hedge, I'll get back in the game on the bull put side.
Still, having said all of this, I placed a bull put spread today, but then cancelled it. The premiums are irresistable compared to bear calls. I think it was you who once said that these credit spreads can become like a "drug". That credit coming in month-after-month, becomes habit-forming. But eventually, the party ends or is at least interrupted and, let's face it, our potential risk to reward is very large (which is why Coach stresses risk management so much). I'm just worried that I don't have any risk management options available to me if a black swan occurs.
Thanks for the warning, as it forces me to write down my reasons for what I'm doing and then to ascertain if they still make sense.
Quote from andysmith:
rdemyan, you may want to rethink this strategy.... I've heard from some TOS folks that in the last 3 to 4 years, almost all the adjustments on their condors/spreads have been on the call side... check with them...
