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Karen The Supertrader: Myth Or Reality?


Karen the "SuperTrader" has generated a lot of curiosity in the trading community. She has been interviewed on TastyTrade twice. The title of the last interview was "OPTION TRADER makes $105MM PROFIT in the NDX, SPX and RUT. Is she real? Does she really generate all those outstanding profits? Do you think Karen is a fraud? This article aims to clarify some facts about Karen SuperTrader and her trading results.

First, few facts about Karen the Supertrader's strategy. She started trading index options in 2008 with $100,000. The highlights of her strategy:

  • She mainly trades the S&P 500 Index (SPX).
  • Sells calls and puts (strangles) at 56 DTE (Days To Expiration) and keeps the trade on for a few weeks.
  • Calls are about 10% OTM, puts about 12% OTM.
  • Karen commits around 50% of her capital, though sometimes she will go as high as a 70% capital commitment.

Those rules can be modified based on market volatility.

 

Here is the video:

 

 

Today she manages 190 million dollars, after making nearly 105 million in profits.

 

 Before we start analyzing Karen the Supertrader's strategy, lets be clear: she did NOT make 105 million in profits as TastyTrade claims. That number includes money from new investors. This headline is misleading at best, deception at worst.

 

How much did she really make? We don't really know, but lets try to "guess".

 

With SPX currently at 2075, she would sell May 1825 puts and 2280 calls. This is how the P/L chart would look:

 

4a65d696aaab7c89edd82999349c77ac.png

 

So she would get around $700 credit on ~21k in margin. If she holds till expiration and both options expire worthless, the trade produces 3.5% gain in 59 days. That's 21% annualized gain on 50% capital, or ~11% gain on the whole account.

 

This assumes that both options expire worthless and no adjustment is needed. This also assumes regular margin. With her capital, she obviously gets portfolio margin, so her margin requirements are significantly less. But if she wants to take advantage of portfolio margin, she has to sell more contracts, taking much more risk. For the sake of her investors, I hope she is using 50% of the regular margin, not portfolio margin.

 

In any case, I have hard time to see how she can make more than 25-30%/year with this strategy. Don't get me wrong, this is an excellent return - however, by selling naked options, she also takes a LOT of risk. To make 25-30%/year with this strategy, she must use a lot of portfolio margin - which means a lot of leverage.  Karen the Supertrader’s strategy is also short gamma and short vega, which means as the market moves against her, the positions become worse at a greater rate. If volatility spikes like it did in 2008, her account will be gone in matter of days.

 

Here are some questions/comments taken from public discussions about Karen SuperTrader:

  1. I really have no idea how that is possible. In the TOS platform, if I sell a naked Put, the usual margin required is very large. We’re talking that my short Put usually would yield between 1.5% – 2.5% of the margin required. -
  2. I think there is more than a fair chance she may be a fraud and possibly even an invention of TastyTrade. Any manager worth her salt would be happy to provide audited returns, especially if only managing 150 million.
  3. She is probably generating around 30% a year while taking a lot of risk. I don’t know if that makes sense in the long run.
  4. Another thing that’s strange is the fact there’s not even one chart or table of her performance. I hear a lot of big numbers but just give the facts black on white.
  5. This strategy will only work for a period of time. When it stops, the results will be catastrophic.
  6. If she was that good as she claims she is, after 7 years of such spectacular returns she would have few billion under management, not 190 million.
  7. It’s Finance 101 isn’t it? The higher the return, the higher the risk you have to take. If she is generating 30% or greater per year, she is taking on a lot of risk. Hopefully her investors realize that.

 

Here are some articles about Karen SuperTrader:

 

http://www.optionstradingiq.com/karen-the-supertrader/

http://smoothprofit.blogspot.ca/2012/11/a-glimpse-of-option-strategies-of-karen.html

 

So: IS Karen SuperTrader myth or reality? You decide.

 

June 2016 update:

 

Karen is now being investigated by the SEC for fraud. Don't say we didn't warn you.

Read my latest article: Karen Supertrader: Too Good To Be True?

 

I suspect that investors will not learn the lesson from this case.  Humans desperately want to believe there is a way to make money with no or little risk. That’s why Bernie Madoff existed, and it will never change.

TastyTrade removed all articles and videos related to Karen the Supertrader from their website and YouTube right after the SEC investigation started, but returned them few days afterwards.
 

 

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Thanks Kim, now it is very clear to me that this was a hoax. I tried selling naked puts, but was always baffled by low returns on margin and enormous risk. In fact I am now in a naked put situation which is deep in the money and I had to either take possession of stock or roll the put out in time. I rolled 1 year out. Hopefully I will get out at break even.

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Guest Chris

Posted

I've personally reviewed her fund's offering documents and audited returns and she has returned around 30% annually. I didn't invest however as I shy away from "convergent" strategies (high frequency of small wins & small frequency of large losses) and prefer "divergent" strategies (small frequency of large wins and large frequency of small losses). Premium selling is convergent while trend following is divergent. But nonetheless she is a very real person with a very real fund and real returns.

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Guest Chris

Posted

She's real and does around 30% annually (at least she did when I reviewed her offering documents last year).  Here is a filing for her fund with the SEC:

 

http://www.sec.gov/Archives/edgar/data/1516872/000151687215000003/xslFormDX01/primary_doc.xml

 

I'm sure she would be happy to share her offering documents and audited returns with anyone if they are an accredited investor.

 

Karen Bruton

Hope Investments

5203 Maryland Way, Suite 104

Brentwood, Tennessee  37027

615-370-5862

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The simple truth is that on risk adjusted basis, those are not very attractive returns. The risk is just too high. I can promise you that in 2008, similar strategies would destroy your account very quickly.

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Guest Samico

Posted

The point imho is that to use those level of risk is unacceptable no matter what time is it. Nobody can predict when a bs will occur. So its useless.

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Chris is correct, Karen is operating a private fund available only to accredited investors.

 

All trading has risk. It's not the strategy that determines if something is risky...it's the position size (amount of leverage) and risk management that does (and then the discipline of the trader to follow the plan which often means taking a pre-defined loss before it gets out of control).

 

And past performance doesn't guarantee future results. There is a difference between saying "xyz strategy makes x% per year" and "xyz strategy has made x% per year". A subtle difference, but one is stating a historical fact while another implies something about future performance and is therefore a prediction. 

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Guest Chris is a Shill

Posted

To the author of this blog post - report Karen and her fund to the SEC and ask them to review her fund. They will decide if she is a fraud or not. 

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Guest jedimarkus

Posted

Regardless of real or fake or embellished, the most important points are:

 

If volatility spikes like it did in 2008, her account will be gone in matter of days.

This strategy will only work for a period of time. When it stops, the results will be catastrophic.

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Guest DoesNotMatter

Posted

okay most people think she sell the PUT and thats all ..  No  its probably not the case.  Trading is  NOT about a single formula but the journey from opening  and closing that position !(ofcourse opening and closing is also included).

 

Her earnings can be verifed and  her part of earning which she fully donated can also be verified.  (But She does not need to do that for you, its not important)

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Listen, Kim did the math and got it right before it was revealed that she does do around 30% in the above posts.  He got it spot on.  What are the odds.

 

The math also shows, again, that he is right about the risk involved.  

 

Luckily, Options can be backtested, no b.s.

 

The fund can grow fast because of prior year performance and her background being a huge seller.  She probably has a deal with TastyTrade and other shows to help market.  It also encourages people to join TastyTrade by showing how rich you "could" end up.  But, they're not telling you how much you COULD lose.

 

She appears to be marketing, Kim doesn't.  There are quite a few people who made 100-200k on the 2008 downturn.  Timing was by chance for them, as stock investing started becoming more popular around then to the retails.  This was all she needed to start the fund.  

 

She might've lost money elsewhere, but won't speak of it.  Her Options account did well though, she's playing it up temporarily.  End of story.

 

What's wrong is the risk isn't fully explained.

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Seems that the crux of the system lies in the 'adjustments'.  She says that when the delta gets to about 30%, she rolls up/down/out as needed. If this is *always* possible, then the theoretical risk would be dramatically reduced in practice.

 

Not sure how well that would work in a 'crash-flash', although there are now safeguards in place that will stop trading if the momentum gets anywhere near a flash-crash.

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The problem is that rolling inevitably increases the risk as well. If the market moves sharply in one direction, rolling won't help. Just ask those who sold naked puts in 1987. 

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One thing I don't see mentioned in the above comments:  in one of the TastyTrade interviews she mentions that futures have always been a part of her defensive strategy.  That could certainly account for the longevity of her strategy, especially during '08. 

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Guest RussC

Posted

I know this is late to the game, but the strikes Karen uses are much farther out than is posted in this article.  First, she assumes the market is 100 point lower, then goes a full standard devition below that.  So, right the SPX is 2050, that would put the Puts at 230 points below 2050, or 1820!!! Do the same math for the Call side.   She sells 2 puts to 1 call, as the market pays more premium due to volatility skew.  She has said in subsequent interviews that she will even go as low as 5% OTM, so that would be 1775(given 2050)!!

 

I do agree with the  person above, she's never seen a '87 or 2008 downturn, that will be the real test of her strategy.

RussC

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Well, going so far OTM means also much lower premiums. Assuming May expiration (7 weeks), the premium for the puts is only $4.50. That's about 2% return on margin in almost 2 months. So even if all options expire worthless, that's about 15% annual return, even assuming she uses 100% of the margin. of course she has portfolio margin, but if she is using it, she is taking even higher risk.

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Guest TheTruth

Posted

@SteadyOptions

Karen does use portfolio margin. There is a pretty good chance that at some point her fund will blow up. After the second video were they had her back and she talked more about her underlying strategy, I went and back tested the strategy myself for major market crashes to see if I would survive. The answer was no. She would have blown up if the flash crash in 2010 had lasted. Similarly the strategy would have blown up in 1987, 2000, and the 2008-2009 crash. 

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Very good article !

It's completly irresponsible if Tastytrade says she makes 100musd instead of just 30% per year (with a max risk).

Because, inexperienced investors could try to replicate such strategy and go to bankruptcy with their families.

Such attitude is a pity.

I hope investors will read your article in order to realize in the case of a flash crack, there is a high probability they will loose all with this strategy !!!

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I'm not sure how that would work, I need to pull the SEC complaint.

Sure you can market time to increase profits on one quarter (or month or whatever your incentive cycle fee you run your fund on), but that only works for that one billing cycle as your high water mark moves up.

Example:

Fund has $100m and $5m in unrealized losses and $10m in unrealized gains.  Fees are only earned on realized returns (which is a bad practice, fees should be based on current NAV), but if you only pay on realized gains/losses ok (warning flag, but in of itself if its disclosed to investors is not wrong).

So at the end of the month, the fund manager sells the winning positions to realize the gains then holds the losing.  So they earn fees on a $10m gain.

But this fund's positions are only for 50 days or so.  So those losses would be realized in the next billing cycle and should "even out" over time.

The only way that would not work is if you truly cooked the books and did not count a roll of a losing position as a realized loss - which is not true, rolling to a new position is a new position and the gain/loss must be booked then.  If that's what she did, then that's big time accounting fraud.  You could infinitely never have a realized loss if  you did that.

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"You could infinitely never have a realized loss if  you did that."

 

Many newsletters actually do it, but since the rolling is usually done for a debit, at some point you simply don't have enough margin to continue doing it. If the market reverses, then yes, you can get away with this practice. But if it continues in the same direction, at some point your account is toast.

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This is why you mark to market (reporting based on NAV) and compare performance of one strategy to another with risk adjusted measurements like drawdown, standard deviation, and Sharpe Ratio. 

 

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Thanks for the link. She basically went the path of those newsletters that tried to roll positions indefinitely. Hate to say "told you so".

I was really surprised that Tom Sosnoff was promoting her so heavily. But maybe I shouldn't be, after reading some of his "studies". 

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It's not surprising to me that Sosnoff pushed her story hard. She presumably learned the ropes on tasty trade and by all appearances appeared to be very successful.

I too found the story intriguing at the time ... but was also very frustrated that the coverage never seemed to explain how the black swan risk was addressed. Guess I should have known to trust my intuition that something was fishy.

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11 hours ago, Guest Karen Is a Fraud said:

This article summed it up pretty well...http://macro-ops.com/karen-the-supertrader-goes-rogue/

Yes, this is well written. The excess leverage created the problem.

Over a year ago I wrote the following on this thread (3/23/15):

"All trading has risk. It's not the strategy that determines if something is risky...it's the position size (amount of leverage) and risk management that does (and then the discipline of the trader to follow the plan which often means taking a pre-defined loss before it gets out of control)."

Is selling naked options risky? That's the wrong question - ask better questions, and you'll get better answers...Is selling excessively leveraged naked options that aren't cash secured risky? Yes, eventually. Short strangles on SPX and other index products are money making trades over the long term, you just have to use sensible position size and sensible exits. Just don't get greedy. Pigs get fat, hogs get slaughtered.

" The point here is not to dismiss all volatility and option selling strategies as useless and blow up prone. The short volatility trade on equity indices is one of the best trades out there. It does very well long-term.

Finally, to be fair we haven't heard Karen's side of the story yet. But casting stones shouldn't be anyone's objective here, but to learn something. Understand your risk. In fact, be obsessed with risk management if you want to survive as a trader for the long term.

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As I mentioned in the article:

That's 21% annualized gain on 50% capital, or ~11% gain on the whole account. This assuming all options expire worthless every month (which is not likely).

So it is clear that to get 25-30% annual return, she had to use much more leverage. This might work for few months or even years, but eventually will blow out. And we didn't even have any really significant moves in the recent few years. Imagine what would happen to this strategy with leverage she used in 2008..

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Just posted a new article:

Turns out (from the SEC complaint) that not only she lost tons of money (57M according to SEC), but she actually committed a long list of frauds. For example:

89. Between November 2014 and March 2016, Hope collected over $6 million in incentive fees from the HI Fund.

90. Most of the incentive fees would not have been paid in the absence of the Scheme Trades.

100. The Defendants never told the Funds’ investors that Hope was causing the Funds to make trades for the primary purpose of avoiding realization of losses.

105. Hope redeems investors exiting the HI Fund without reducing the value of their investments by the HI Fund’s large net unrealized losses.

106. Consequently, redeeming investors get a windfall, while the pro rata share of the unrealized losses to the remaining investors increases.

107. While the Fund states that investors will redeem exclusive of unrealized losses, the Fund does not inform new investors that the value of their investments are subject to immediate reduction as a result of their being saddled with a pro rata share of large unrealized losses.

108. The manner by which the HI Fund pays redemptions (excluding unrealized losses) creates a risk that, if the unrealized losses continue or there is a significant exodus, the last investors to redeem will not get any money. That risk is not expressly disclosed to investors.

https://www.sec.gov/litigation/complaints/2016/comp-pr2016-98.pdf

 

tastytrade response? They are editing their old articles about Karen to 

This all smells like a classic Ponzi scheme…Pay the old investors with money from the new ones."

 

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Guest Mark17

Posted

On 6/1/2016 at 11:00 AM, cwelsh said:

I'm not sure how that would work, I need to pull the SEC complaint.

Sure you can market time to increase profits on one quarter (or month or whatever your incentive cycle fee you run your fund on), but that only works for that one billing cycle as your high water mark moves up.

Example:

Fund has $100m and $5m in unrealized losses and $10m in unrealized gains.  Fees are only earned on realized returns (which is a bad practice, fees should be based on current NAV), but if you only pay on realized gains/losses ok (warning flag, but in of itself if its disclosed to investors is not wrong).

So at the end of the month, the fund manager sells the winning positions to realize the gains then holds the losing.  So they earn fees on a $10m gain.

But this fund's positions are only for 50 days or so.  So those losses would be realized in the next billing cycle and should "even out" over time.

The only way that would not work is if you truly cooked the books and did not count a roll of a losing position as a realized loss - which is not true, rolling to a new position is a new position and the gain/loss must be booked then.  If that's what she did, then that's big time accounting fraud.  You could infinitely never have a realized loss if  you did that.

The complaint suggests the fund has been in drawdown since  October 2014 and has collected incentive fees in recent months.  I therefore infer it has been collecting incentive fees throughout.  Now like you said, the fund's positions are only for a couple months so what kind of fraudulent accounting method has allowed that?  Is it possible that the Scheme trades have somehow grown in size continually to allow this? 

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The scheme trades would have to have grown. Also, the nature of the scheme trades is ATM or ITM calls. This is not the 2SD put 56dte strategy that she describes as her core strategy.

Lies from top to bottom. Her strategy as described in the videos notes that 1) all puts sold are managed at 25% of max profit. 2) Calls are only sold independent of puts in extreme overbought conditions with max calls outlayed equalling 1/2 the number of puts open at one time.

Trade the strategy as described, and your returns on risk are alot higher than strangles held to expiration.

But Karen didn't trade as she described. So, whether it was or wasn't profitable is moot. A sham from top to bottom. Greedy fee collection from unearned profits, criminal accounting and lack of disclosure. Complete fabrication of intended fund management style. All lies.

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3 hours ago, Guest Guest said:

Tom Sosnoff doesn't think so... he gave his comments the other day.

Right. He thinks Karen was not paid enough. $6M in illegal fees while the fund was down $57M and all Sosnoff has to say is that she was not paid enough. Instead of taking responsibility for his reckless endorsement and apologize to investors who have lost millions because of him, this is his response. Unbelievable.

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The clip I saw all he could talk about was how unfair she was being treated by the big, bad government. She didn't knowingly do anything wrong, she just was "naive" at running a hedge fund (cough cough).  He kept urging the audience to let everything play out.  Why does this guy continue defending her?

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Well, Tom continues to play his role as a defender of a small guy against the establishment and evil government. Sure, Karen did not know that she is talking $5M in fees. She did not know that she is making scheme trades those all goal was to hide the losses. 

The only thing I believe she did not know was how much risk she is taking with her strategy. It's possible that Tom also did not know that. After watching few of his "studies" I'm not even sure the guy has a basic understanding of options trading.

"You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time."

Whoever said that was wrong in case of Tom Sosnoff.

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The other aspect of this that Tom mentioned is that at TOS before they sold it to TDA, they basically watched Karen trade her account and saw what she did, how she did it and the gains that she made for herself before she became a money manager. It seems that they just can't believe that it turned into what it did.

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Guest karen is going to jail

Posted

plus you guys should re-read your posts. what a bunch of tools you are. she is a thief 

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Guest jet05

Posted

SOME good points... But, there are some facts that are untrue. One of them is that at the end of the article you say "tastytrade removed all articles and videos related to Karen Supertrader from their website and YouTube."... Not true. They are all still there, they just put disclaimers. 

You also say TastyTrade may have even invented her. While this isn't necessarily an allegation because you said "may have", it is still proof you haven't quite done your research. She IS registered with the SEC as managing a TON of money. I understand it's not easy to research everything... But at least do a quick search and you can find this type of stuff out. 

And by the way, I'm not a die hard "tasty trader". I actually own a company that would be considered a competitor of them and I have seen a lot of flaws in what they do (although being honest, I believe they are doing more good than bad). 

One final thought (and i'm just rambling here), tastytrade mentions TDA several times in the interview and she even says she met with TDA to assess risk... It can't be completely false or TDA would have been upset with TT for posting the interview (they are a marketing partner of TDA). They can see everything Karen does. I highly doubt it's all a fraud. 

That being said, learning about how she did her accounting seems absolutely ridiculous to me. Why is it okay to ONLY report realized profits but not unrealized profits??? OR, DON'T CONSIDER ROLLING TRADES AS UNREALIZED RETURNS!!! Rolling a trade is just a matter of closing one trade and opening another. So at least report the closed trades in the investor statements.

I don't know how I feel about the whole Karen situation. I run a fund that consists of short premium but I maintain a TON of short delta which has really caused me a lot of headache and sleepless nights over the past year or two but at the same time, I have the peace of mind knowing our margin requirements won't blow up on us causing us to lose our entire fund...

After all, Karen DID inspire me to go ahead and start my own fund which has been AMAZING so far... I can only hope she is innocent and she was just given horrible accounting advice... Knowing her trading strategy (selling 2 SD OTM options), I can't see her losing any money recently... Unless she got too big with size and her margin requirements blew up... 

I don't know. I guess we will see! Watching closely.

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Dear jet05,

tastytrade did remove all articles and videos for few days after the SEC claim went public, but after few days they came back.

I did not say that TastyTrade may have even invented her. This was one of the "some questions/comments taken from public discussions about Karen SuperTrader". This specific quote was taken from here (read the comments section).

As for TDA - yes, this was the case when she just started the fund, but it might not be true anymore.

Please note that in this article, I obviously did not know about the SEC allegations. My point was to show that those strategies are too risky and will backfire at some point if too much leverage was used. The rolling techniques that she started to implement (according to the SEC) were a result of the heavy losses she tried to hide. 

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Guest Seareader

Posted

If it's too good to be true it's too good to be true ... SEC will decide if its real or not but I never bought in to the story. The worst part is that when the story was floating around a lot of traders beat themselves up because they could never ever come close to her rate of return. We watched the nauseating episodes on Tasty Trade and walked away scratching our heads.  

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Guest Martin

Posted

Interesting article. Very educational. Shows the risks of leverage. Karen Supertrader was an aspiration to many traders. No wonder tastytrade was promoting her. It caused more and more traders to get the illusion how easy it is to make millions in trading and open new accounts with TDA. And Tom gets his kickbacks. How convenient. 

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Guest Guest Dom

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I have to somewhat disagree here on her results or maybe need some argument against this. Yes, later it was determined when losses piled in she committed fraud from an accounting perspective...books and records? But till this day, Tom Sosnoff noted (leaving aside all the fraud, etc. she committed), when still with TD, seen what she was doing and profit/losses wise in the beginning and tracked her b/c of the risk she took on and noted she literally did turn 100K into big time money. You can't fake that in the trading applicatoin, yes on books and records with shady account you can cover up losess, but he seen her trading first hand b/c her risk hit an alert on their side where she needed to be tracked and contacted......so what am I missing here from the pure trading point?

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As mentioned in the article:

She did NOT make 105 million in profits as TastyTrade claims. That number includes money from new investors. 

 

So yes, she still made good returns before the fraud started, this is not the point.

 

As for Tom Sosnoff "monitoring" her - 2 points:

First, maybe when he was monitoring her, she was taking less risk and started to take more risk later.

Second, everyone has a different definition of risk. I watched Tom Sosnoff recommending selling naked strangles before earnings on stocks like NFLX and AMZN. To me, this is insane. To him, this is acceptable.

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I hear you on the above, especially when it comes to Risk...everyone has different definition. I didn't mean to make it seem like Tom was tracking her or was quoting her risk from his view...it was TD in general similar to any other brokerage (Etrade, etc.) when a retail investor puts on huge risk it pops in their metrics. Just so happened Tom seen this as well b/c he was still working with them (TD) in the early years when he begun tasty trades. Did he use her later on to promote tasty...probably

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Yes, it might to pop up if the risk is such that it can completely blow up the account and put the broker at risk of losing money. Maybe in this case it was not to such degree, but was enough to lose 30-40% which is still huge for the clients, but the broker doesn't really care. 

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Thank you Kim for pointing that out, risk sizing is so often overlooked. I really hurt myself early on taking too much risk and not understanding that I was doing so, and I got away with it for a few trades thinking I was a genius but then got hit hard and lost all of my gains and then some. 

Edited by esqtrades
grammer

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