‘Captain Condor’ Crash Serves as a Strong Reminder About Risk Management

It wasn’t a reckless, high-risk trade that sank a successful options trader over the Christmas holiday it was a centuries-old betting method favored by amateur blackjack players.

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David Chau, a 32-year-old day trader, and his followers suffered tens of millions in losses on Christmas Eve, illustrating the dangers of the Martingale strategy, a system famously mentioned in the memoirs of Venetian adventurer Giacomo Casanova.

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The capital at risk included Chau’s own funds, money managed through his hedge fund SPX MGMT, and investments from a group of small-time traders who pay $5,500 annually for access to his trading plans.

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Chau, widely known in S&P 500 Index options circles as “Captain Condor,” gained his nickname from his signature trade the “iron condor” which resembles the outstretched wings of a raptor on a chart. The iron condor involves buying or selling a call spread above the market and a put spread below it, making it a relatively modest wager on whether the market will remain within a defined range. Retail trading platforms often promote condors as a way to collect premium if the market stays stable.

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Options experts note that condors can be an effective strategy when executed correctly. But by applying the Martingale method doubling positions after losses Chau’s trades ballooned in size, just as trading volumes fell during the Christmas holiday. On Christmas Eve, S&P 500 options activity was the second-lowest of the year, surpassed only by Black Friday on Nov. 28.

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“This trade was enormous, and the timing couldn’t have been worse,” said Jason Coogan, a trader at the Cboe Options Exchange S&P 500 pit. “Holidays mean fewer participants and lower liquidity, which makes the market more sensitive.”

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Over several days, Chau’s group repeatedly sold iron condors, wagering that the S&P 500 would remain in a narrow range, and doubled their positions whenever the index moved outside that range. By Dec. 23, the total position in condors expiring the next day reached around 90,000 contracts. Because U.S. options markets are highly transparent, other market participants could see the growing risk well before the losses materialized.

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The spreads involved were tight only five points apart and the market moved just 0.3% on Dec. 24. Still, selling the 6890/6885 put spread and the 6920/6925 call spread generated roughly $13 million in premium but resulted in a maximum net loss of about $32 million, according to Trade Algo. Chau appears to have paused trading since that day.

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“The issue with doubling down is that it escalates exposure to an unsustainable level,” said Matthew Amberson, founder and CEO of Option Research & Technology Services.

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Some options professionals speculate that market makers may have deliberately pushed the S&P 500 with long positions to trigger Chau’s losses. “With a position that big and public, the holiday environment allowed others to influence short-term price moves,” Coogan said. Others, however, dismiss any notion that the S&P 500 can be easily manipulated given the market’s depth.

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Regardless, it was the Martingale approach doubling stakes after each loss that caused Chau’s Christmas Eve blowup. The strategy effectively transforms many small statistical edges into a single, highly risky bet. Modern risk management usually works in the opposite direction: it reduces exposure after losses, controls tail risk, and preserves capital to allow small advantages to compound. Without these safeguards, what appears as steady returns becomes leveraged speculation.

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“Martingale isn’t an edge it converts frequent small gains into rare, catastrophic losses,” said Jason Trost, CEO of Smarkets. “You’re increasing risk to capture a capped payoff, and in real markets, capital, margin, and liquidity constraints hit long before the math saves you.”

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Short-term options trading, including zero-day contracts, has surged since the pandemic, pushing overall options volumes to record highs over the past six years. Selling options on near-term contracts has been credited with reducing volatility in stock markets.

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Chau expressed regret over the losses. “I feel guilty for what happened, but I’m optimistic there is room to improve,” he wrote via email. “Although the model didn’t anticipate this outcome, I’ve identified the issue and am actively updating it.”

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Captain Condor’s collapse, first reported by MarketWatch, underscores the risks of option-selling strategies, where potential losses far exceed limited gains. It mirrors prior disasters, such as James Cordier’s 2018 options-futures losses, which wiped out retirees’ investments.

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Even centuries ago, gamblers faced the same peril. Casanova’s memoirs recount how doubling bets in Venice’s Carnevale ultimately drained his fortune, forcing him to sell his lover’s diamonds and end their plans to flee together.

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“The lesson is clear,” Amberson said. “If you hit a losing streak, you can’t try to recoup it all at once that’s a gambler’s fallacy, not investing.”

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