Every trader has trades that go wrong. And in fact, it’s often been said the best traders in the world aim to “only” get 55% of their trades right, which means 45% of his/her trades will be losers. But it’s how you manage those losing trades that can make or break your year/career. This brings me to …
Two weeks ago, Market Watch profiled an Iron Condor trading system that blew up. Before I go into a deep dive on how this trade fell apart, let me highlight what exactly an Iron Condor is.
An Iron Condor is a strategy where a trader bets that a stock or an index won’t make a big move … essentially selling insurance against a dramatic move. And if the stock/index doesn’t make that big move, the trader walks away with an insurance premium.
However, if the stock/index DOES make a big move, the pain can be considerable, as the insurance policy that the trader sold would have to pay out.
Think of an Iron Condor seller almost as an insurance company writing insurance against a tornado.
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With that background, here is some of what Market Watch wrote about this Iron Condor system that blew up …
The options trader known as “Captain Condor” and his acolytes experienced a wipeout last week that incinerated tens of millions of dollars and cost some investors their life savings.
A strategy that had reliably produced winnings for the trader — whose real name is David Chau (32 years old) — and his group of roughly 1,000 investors went awry just before Christmas, saddling them with what was, by one count, a $50 million loss.
The fatal flaw — what finally caused Chau and his crew to lose most or all of their trading capital — was his use of the Martingale betting system. In the Martingale system, the bettor doubles down after each loss, hoping to recoup their money and then some.
After a streak of mounting losses, Chau and his followers risked it all on Christmas Eve and saw the last of their capital wiped out as the S&P 500 tallied a record closing high.
The group suffered a loss of more than $30 million on Christmas Eve after selling more than 90,000 Iron Condor spreads.
Now I’m not going to get into the nitty-gritty of the details of these trades that went horribly wrong, as it can be a bit confusing for many readers. But what I will highlight is the biggest mistake the traders made, and that was doubling down repeatedly.
Essentially, the group first sold 4,400 Iron Condors, which turned out to be a losing trade, so …
The next trade, the group sold 17,000 Iron Condors. That also didn’t work. So …
The third trade the group sold 48,000 Iron Condors, and as you might imagine, that trade failed again. So …
For the final trade, which officially blew the group out, these traders sold 99,000 Iron Condors, which did not work.
Just sooooo bad!
Stepping back, I have no issue with Iron Condors as an options trading strategy, as they tend to work over time.
However, the doubling down/Martingale system is pure insanity and is exactly how traders blow up their accounts.
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