Jerry was doing quite well as a trader. Only taking positions on SPY, he was quite comfortable with his entries, exits, usually profiting handsomely. He took home some nice toys, had a great family life and thoroughly enjoyed every day as the envy of all who knew him.

He had amassed quite an account and was trading some pretty big numbers – $10k to $20k and even more was not unusual. He would place a trade, make money, close out. Do it again, again and again. Life was good.

Then one day, on the way to Orlando to meet up with some other trader friends for a few days, he placed a trade – this time while waiting to board his plane – something like $56,000 on some SPY calls that were to expire in a few days.

No worries, there were ‘clear skies’ ahead. No news scheduled to thwart the market. Great chart patterns. Lots of open interest with healthy volumes… nothing to fear. His usual 8% sell order was in place.

“Now boarding Gate 6, please have your boarding passes ready.”

Close the laptop, get on the plane. Sell order in place.

Upon landing at Orlando International, he met his buddies. “Hey guys, great to see you… but what’s with the long faces? Who died?”

“Haven’t you heard? President Obama just declared war on Wall Street.”

Not good news at all. Jerry wished it as all just a bad dream.

A quick ride to the hotel, open the laptop and sure enough…. the market had tanked.

So had Jerry’s jaw. He was sitting on a fortune in call options expiring later that week.

SPY had just tumbled from about $115 to $113 in one day. A normal day today, a $2 move was huge back then.

Jerry took another $3 hit the following day and continued downward to about $109 in a matter of several days. Deer in the headlights; it was too far gone to recover. It was impossible to pull it back out of the fire.

The options quickly lost value in intrinsic, time and volatility. All Jerry could do was to try to save what little was left.

I never did find out just how much he had lost in that landslide, but it was severe. The good news was that he did salvage some of his capital, as little as it was.

Check out the chart above. This is a trader’s worst nightmare when you are holding call options with little time left.

It was supposed to be a relaxing vacation for Jerry, meeting up with some friends and his kids to enjoy a trip to Disney World. Instead, the stress took its toll and he became so ill that he had to rush to the Orlando General Hospital. Fortunately, he recovered. His trading account… well, that took a while, but he did get back on track. In the ensuing several years, he brought his minimal account back up to where it was before the meltdown.