A Tragic Tale of Too Much Risk (Preview)

By Lawrence G. McMillan

Many option traders have read about the disaster that befell traders involved in selling condors recommended by David Chau, the self-named “Captain Condor.” To quickly summarize what happened, here are the salient points:

Chau and his followers (mostly subscribers) would sell condors using 0DTE options – generally on $SPX, SPY or sometimes QQQ – whenever when realized volatility exceeded implied volatility two days in a row.

1. If the trade lost, then triple up for the next day and sell a new 0DTE condor. This is a modification of what is called a Martingale progression. We’ll discuss more about Martingale progressions in a minute, but suffice it to say that a series of losses could get one into a lot of trouble. However, Chau claimed that in back-testing, the system had never lost a certain number of days in a row (certain reports say six in a row; others said four). So, if there are losses for two or three or four days, just keep tripling up. I hope you’re cringing at this by now.
2. As it turned out, there were losses large enough to wipe everyone out. To make it even worse, the last loss was on Christmas Eve, thereby ruining the holiday for those traders.

From scanning the internet, I was able to see the last few trades. I’m not sure how many there were prior to this, but the last three were:

• 12/19/25 – $SPX closed at 6834, so the trade for the 12/22 expiration was:
  Buy the 6865 calls and sell the 6860 calls, and also buy the 6795 puts and sell the 6800 puts.
  These 5-point condors were generally sold for about 1.70 credit. If $SPX finished between 6800 and 6860, the condor would be worthless, and the profit would equal the initial credit.
• 12/22/25 – However that day, $SPX closed at 6878, which was above the highest strike, so the max loss of 3.30 was incurred (the width of the spread – 5 points – less the credit received).
  So now a new condor was re-centered, based on the $SPX price of 6878.
  The four strikes involved were 6850 puts bought, 6855 puts sold, 6900 calls sold, and 6905 calls bought
• 12/23/25 – Again, $SPX rallied and closed at 6909 – above the highest strike, and once again the max loss was incurred. By this time, the position sizing was so large that it was noticeable to many observers and traders in the option market. The condor for the next day was the following:
  Bought 6885 puts, sold 6890 puts, sold 6920 calls, and bought 6925 calls.
• 12/24/25 – again $SPX continued to rally and closed at 6932, thus incurring the max loss once again.

At that point, the progression apparently ceased, and postings on social media indicated that hundreds of traders had been wiped out.

What is really ridiculous is that prior to the carnage that took place, Chau was being celebrated as a knowledgeable option trader – even by the Wall Street Journal. Fortunately, there was one voice of reason: SpotGamma founder Brent Kochuba — an experienced derivatives‑data professional — was one of the voices observing Chau’s iron condor positions and warning about the risk inherent in the way they were managed. Kochuba highlighted that Chau’s use of a Martingale‑style approach greatly increased risk and could lead to catastrophic outcomes — which ultimately happened.

The killer for this strategy wasn’t necessarily the selling condors based on the difference between realized and implied volatility. Nor was it the use of 0DTE options (although they are so hated in some parts of the trading universe that certain articles used this as an excuse to take pot shots at 0DTE options once again). No, the problem was the risk management strategy.

We have discussed many times in the past, and we have a whole recorded video webinar on the subject: Risk Management Webinar. Also, it is covered extensively in the last chapter of McMillan On Options. But, here is a brief summary of progressive money management techniques:

The Martingale System

In its basic form, a Martingale approach to position sizing is to double up each time you lose. Eventually, when you when the whole sequence will produce at profit. Suppose you start with a bet size of 1, then bet 2 if you lose, then 4 if you lose that, etc. A sequence of six losses, followed by a win would look like this:

-1, -2, -4, -8, -16, -32, -64, +128. Add them all together, and it totals +1.

The problem is that if the string of losses is large enough, it will exceed your bankroll, or the required bet will be larger than the house allows at whatever game you’re playing. When that happens, you must stop the sequence, and you’re faced with a huge loss.

This is what Chau and his associates were doing, although it appears from what I’ve read that they were tripling up. Do not ever use this approach to position sizing. Rather use “progressive betting” instead.

Progressive Money Management

In this sense, “progressive” means happening or developing gradually or in stages; proceeding step by step. It has nothing to do with politics. In progressive betting or trading, you increase your bet size as you win. However, when you lose, you reduce your bet to the original size.

I’m going to discuss three progressive money management strategies.

1. Fibonacci
2. percent of your bankroll
3. Kelly