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Karen The Supertrader: Too Good To Be True?


My Karen Supertrader: Myth Or Reality? article provided a different angle about this "superhero" created by tastytrade. As a reminder, tastytrade promoted her as OPTION TRADER makes $105MM PROFIT in the NDX, SPX & RUT. Now Karen Bruton the Supertrader is being investigated by the SEC for fraud.

What lessons we can learn from this debacle?

Were the Skeptics Right?

 

"Self-taught options trader Karen Bruton (aka Karen the Supertrader) earned so much so quickly that some skeptics doubted her. In reality, the SEC says, she improperly concealed more than $50 million of losses."

 

The new allegations paint a very un-uber portrait of Bruton, 66, a self-taught options trader who mesmerized fans and flummoxed skeptics with her life story of parlaying a $10,000 initial investment into a fortune and seemingly endless stream of profits.

 

I'm still trying to understand the motives of tastytrade when they promoted her as making $105MM PROFIT, without properly discussing the risks. They also failed to mention that most of the growth in her fund came from  new money and not actual profits. Was it extreme ignorance or some hidden agenda? You decide.

 

As a reminder, Karen claimed to make 25-30% per year by selling naked options on indexes. 

 

The important point is this: 

 

As I mentioned in my article, there is only one way to make 25-30% per year with this strategy: leverage. Combine leverage with naked strangle strategy which is very risky to begin with is a certain path to financial disaster.

 

Leverage Can Kill You!

 

Our contributor Jesse wrote over a year ago:

 

"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. " 

 

The point is to understand your risk. In fact, be obsessed with risk management if you want to survive as a trader for the long term.

 

Well said Jesse.

 

leverage.jpg

 

Also Hiding the Losses?

 

To add insult to injury, Karen Bruton also started to hide the losses by rolling options positions, as explained here:

 

"Between October and December of 2014, Karen took some heavy losses selling her options. But to keep the incentive fees coming in, she organized a sophisticated options roll at the end of each month. This allowed her to still “realize gains” of 1% every month to take fees from, while pushing unrealized losses out to the next month. Month after month the losses continued to snowball while she continued to collect her fees.

 

Each month began with a huge realized loss. (The SEC reports that these losses now exceed $50 million dollars.) She offset these accrued losses by selling a ton of in-the-money call options on the S&P 500 E-mini futures due to expire at the end of the month. This injected fresh cash into the fund. Just enough so that she could report a small realized gain to investors. That way she could take fees that month too…

 

But of course there’s no free lunch in trading. You don’t get gains out of nowhere. When these call options expired, yes she had her cash injection (from the option premium), but she was also left with a futures position (due to assignment) that carried a huge unrealized loss. Here’s where the loss rolling came in. She needed that futures position to stay open until the next month because if she closed it beforehand, that would realize a loss and cancel out the profits from the calls she sold. That means no incentive fees.

 

So to cover this futures position, she would simultaneously purchasein-the-money call options expiring the following month on the same day she sold those original in-the-money call options. These calls allowed her to offset any gains or losses the futures incurred at the end of the month until the beginning of the next month.

 

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

 

rolling.jpg

 

We are very familiar with those "rolling" techniques. Many options newsletters are using them to hide their losses. As we always said, rolling options position is simply hiding the loss.

 

The Hope Investments fund has been created in March 2011, and October 2014 was only the second time since creation when S&P declined more than 10%. First time (August 2011) she probably hasn't been using as much leverage yet. If the fund experienced such significant losses after 10% market decline, imagine what would happen in 2008-like environment.

 

SJ Options summed it up  nicely:

 

"It’s very important to alert the public of the true risks involved in short strangles because in the interviews the risk is not discussed as much as it should be.  Because of the excessive media exposure, there are many of retail traders attempting to trade this uncovered options strategy that has nearly unlimited risk potential. The short strangle is not as easy as it appears to be.  Margins change quickly and it’s vulnerable to quick losses and margin calls.  Be very careful with this strategy.  We conducted an 85 year backtest of the short strangle, 45 days to expiration, and it lost money overall."

 

Tastytrade Response

 

Tom Sosnoff was asked to respond to Karen Bruton story after the SEC complaint. You can watch his response here (18 minute mark). He continues to defend her, calls her "a very special person" and a victim of an evil government. Tom calls all the publications about Karen "crap". He claims that Karen was actually not paid enough in her fund. However, according to the SEC complaint,  "Between November 2014 and March 2016, Hope collected over $6 million in incentive fees from the HI Fund. As of the same date, the HI Fund had unrealized losses of approximately $57 million." So she took $6M in illegal fees while the fund was down $57M, and Tom says that she was underpaid...

 

Sosnoff also continues to claim that Karen "made ton of money" for her investors. He still sticks to his claim that she turned $100k into $105M between 2008 and 2011, "forgetting" to mention that most of those profits came from new investors money. God knows his true motives, but this article from 2014 gives some insights into the whole "tastytrade/dough/TD Ameritrade" scheme.

 

Here are some articles about Karen SuperTrader:

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We want to hear from you!


tastytrade are now editing their articles about Karen SuperTrader. Here is one example:

Karen The Supertrader

Before:

Cj-6-MDUoAADyQ6.jpg

After:

Cj-6-MFUoAI_k20.jpg

To verify it, google " tastytrade 41,000,000". Google still has the old version before it was edited.

karen.PNG

 

Some articles even have been deleted. For example:

Google "tasty spotlight karen supertrader"

spotlight.PNG

This article has just been deleted. tastytradenetwork.squarespace.com/tt/blog/karen-the-supertrader doesn't exist anymore.

Looks like tastytrade doesn't want to be associated with Karen SuperTrader anymore.

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Guest Guest

Posted

I think you raise a critical point about why TT wanted to promote her so and in a moment, I'm going to bring that back to Tom Sosnoff itself.  It could simply be for the notoriety.  When people saw the success and wanted to be like her, since it was presented at TT and since TT does teach trading, people might turn to TT as a go-to source.  More viewers for TT, new accounts opened at TDA, and kickbacks for Sosnoff et al.  Just speculating here...

And maybe this is all there is.

Yet, to me this really, really comes off as stinky for Tom Sosnoff.  For years the guy has appeared so altruistic in carrying the torch for the retail trader, in wanting to teach people to trade and encourage self-directed traders, etc.  I e-mail him and get personal responses (I believe it's him, anyway).  I met him at a TD Market Drive event.  I guess I do lean more toward thinking now that it is _all_ a charade done in the interests of marketing, advertising, and profit.  Before this, I had become more suspicious of him because I think the TT research leaves a lot to be desired (if you've studied trading system development then you can probably name a handful of reasons why).  Now with this, I really wouldn't be surprised to see Tom Sosnoff as the next big name investigated by the SEC for one thing or another.  I'm disappointed to say the least.

What I would really like is for Tom Sosnoff to come clean about all this.  He erred in his heavy promotion of Karen.  He's quoted a couple times in this piece http://bit.ly/1ZjNRmA (hurry and watch before it gets taken down) where he weighs in on her wonderful character.  Non-profits, charities, and religion are a common tool used by charlatans to pull on the heartstrings and manipulate unsuspecting victims.  This might or might not be another one of those cases but there's NO REASON Sosnoff should have ever championed her cause.  None.  Now if he, too, were getting kickbacks of some sort then it makes more sense.  Indeed, that's about what I would expect from him right now. 

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Well, I'm glad that someone else finally said it, but I 100% agree with your theory. Many people are not aware that after selling thinkorswim, Sosnoff still has significant stake in it. In my opinion, the whole tastytrade/dough/thinkorswim scheme is a HUGE conflict of interests. I also wouldn't be surprised if Sosnoff was paid by Karen to promote her. After all he took an anonymous fund manager and made her superstar.

Now, I don't have a problem that someone does something for money. After all, nobody should work for free. But please be honest and don't present yourself as philanthropist  whose only interest is to help retail traders. To me this is hypocrisy. 

It's funny that you mentioned their "research". Sosnoff calls everyone who doesn't agree with him and doesn't trade his strategies garbage. In fact, what is garbage is their research, as I showed in my articles:

Buying Premium Prior To Earnings - Does It Work?

Can We Profit From Volatility Expansion Into Earnings?

 

btw, Sosnoff has been refusing for years to present his track record and/or account values. To me, this alone is a huge red flag.

 

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Guest Guest ponzi follower

Posted

If the SEC can prove this was a ponzi, all the lucky early redeemers, get ready to return those ill gotten gains. 

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Guest stalin

Posted

Some good points in this article, but not much context around it... 

Care to explain how you  "conducted an 85 year backtest of the short strangle" with official options data going back only to 1973? Assuming you have an answer for that, did you manage the strangles at 50% of max profit? Research is clear that leaving them until expiration makes a huge difference.

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Dear stalin,

The 85 year backtest is a quote from  SJ Options link as you can clearly see (" SJ Options summed it up  nicely:", then the quote), so you will need to ask them.

The point is that those short strangles are much riskier than implied from the tastytrade interviews with Karen. And the context of the article, in case you missed, was to show:

1) How Karen showed gains while in fact the fund has been losing money since October 2014;

2) Why this happened (the main reason was leverage);

3) What retail investors should learn from it.

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.

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Guest CarefulTrader

Posted

" btw, Sosnoff has been refusing for years to present his track record and/or account values. To me, this alone is a huge red flag. "   I concur wholeheartedly!

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I noticed that the speculation is that Karen's losses occurred in the "big" down move in 2015. As a premium seller myself, I have found that down movements have been my most profitable times. My problem is when SPX is manipulated back to the upside, my short calls get run over like a BNSF freight train. My example is a 175p/195c 5$ wide IC in SPY that I sold in Feb this year. I am still rolling the Call side of that condor, which is now 205/215 in Jun 30q's. If Karen is in any trouble at all, it is because of those calls you mentioned that she sold to cover her losses. The last 5 years you could've sold any put in SPY you wanted and still been profitable. You only get in trouble when calls are sold, as you are swimming upstream against the FED's easy money.

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According to the SEC complaint, the losses occurred between October and December 2014. In October S&P was down over 10% and then came back. Now if you sold 12% OTM puts, your account would be down around 10-15%, depending on timing. However, if you applied leverage, you could easily be down anywhere between 30% and 40%. Then she tried to do those scheme trades in order to roll the losses. After the markets came back sharply, some of the sold calls came under pressure as well.

You are right that it is more difficult to defend the upside of those trades. However when using leverage, the picture can change dramatically, and I assume this is what happened.

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So, at this point we know that Karen is a Crystal Palace fraud like all the others, and we're going through lessons learned. Aside from leverage, the biggest red flag that I see looking back, is choosing to trade essentially one underlying product. I can look back through my own p&l's and see that when all I traded was SPX I did pretty poorly. Now I have smaller positions in many different underlyings and I grind out profits over time no matter what one position does. There is no holy grail. Only hard, honest and consistent work and research will benefit your earnings over time.

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Very true. But even if she traded more than one underlying, adding RUT and NDX to the mix, this is still just one strategy. Placing a single strategy, no matter how successful, into a multimillion fund is insane. Applying leverage to already risky strategy makes it almost criminal.

And the question is one again how tastytrade and Tom Sosnoff, who are supposed to be professional options traders with decades of experience, did not recognize those risks and continued promoting her. Or maybe they did and just ignored them because it served their agenda?

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Getting people to trade options and futures on the TOS and dough platforms, and in general funneling traders to open TDA accounts is in part how tastytrade is funded. Mutually beneficial. Tom says in plain language on many  of his videos that they/he directly benefits from new TDA accounts opened through dough.com. Doesn't bother me. It's out in the open. My least favorite content on tastytrade is Tom Sosnoff content.

What I do like about TT is almost every other segment of the network is dedicated to trading reasonably sized, non- correlated positions, and then understanding how the total portfolio is exposed in terms of S&P 500 deltas.

I am way past the point in my own trading to look to other traders for opinion on the direction of a product, but I am happy to have found TT in the sense that they have posted in plain language so many ways to fix/repair/offset/morph bad positions that I just don't take the big losses I used to. By staying small (in leverage per individual position), and diverse (in many non-correlated underlyings) I find that there is very little I can't manage given the time. I credit Tony Batista, Liz and Jenny and Ryan and Beef for demonstrating these fixes everyday.

Karen Bruton was never a tastytrader. I'm sure TT is in talks with TD's legal team about how they can move forward. Karen fooled TT like everyone else with her lies, I believe they had her on because she said she used TOS and the analyze tab to make her trades.

 

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It's good that you are aware of the tastyrade/dough/TOS connection - most people are not. To me this is still huge conflict of interest because it impacts the strategies they trade.

Their "research" might seem solid and convincing to many novice traders, but the truth is many of their studied are highly flawed and skewed to achieve the results that fit them. As for fixing positions - when they recommend selling NFLX or AMZN strangles before earnings because the IV is high, and the stock moves 15-20%, there is no fix. The only thing you can do is to pray and hope that the stock reverses.

Here are some examples of their studies and my rebuttal:

Buying Premium Prior To Earnings - Does It Work?

Can We Profit From Volatility Expansion Into Earnings?

 

They claimed that buying straddles before earnings doesn't work, when in fact we are using this strategy for years with great success. But I'm glad that they exist and have big followup - after all, someone has to sell those straddles to us..

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I do read the TT research as it is one of the few sources of ongoing research.   But you have to take the results in context.  TOS is way too expensive for most retail traders so there has to be a good deal of promotion for it to succeed as a business.   But when I tested all of the SO strategies for performance from 2013 to present, straddles didn't do so well over time.   I think the average ROI was 2.2% per trade.  It varied by market type of course.   Calendars were a far better performer and explains much of the success of SO trading since 2013.  At least those were my results.

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I think it is slightly more than 2.2%, closer to 3%, but you need to take things in context. Those earnings straddles are a cheap way for us to hedge market volatility. Yes, calendars performed much better, but when IV explodes and the markets make huge moves, they will not perform as well. This is where straddles come in place, to balance the portfolio. 

Aug.2011 would be a good example - take a look how those straddles performed https://steadyoptions.com/performance/#tabs2011.

But according to TT "study", the straddles are supposed to lose money - double digit loss on average. This is simply not true. 

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Guest Burt

Posted

One thing I've never liked about Tom (apart from that silly hat and loving the sound of his own voice) is that people on his 'show' remark from time to time that Tom made 600 million selling Think or Swim to Ameritrade. No. He did not make 600 million and I've never seen him make an attempt to correct anyone on this point. Tom part part of a team of people who sold TOS to AT. Tom's cut was substantially less than 600 million. And I have never seen anywhere that Tom can trade his way out of a wet paper bag. He was never truly a trader. He was a market maker.  Yet he paints himself as a trader.

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Well, the fact that Tom "bends" the truth should not come as a surprise, at least not to me. When he says "trader makes $105M in profit" without mentioning that most of the $105M is new money and only small portion of it is a profit - what can you really expect from him?

And yes, the fact that someone was a successful entrepreneur and/or market maker doesn't necessarily makes him a successful trader. Successful traders are not afraid to reveal their P/L. 

As for his part of the sale - " Thinkorswim was sold to TD Ameritrade for approximately $606 million[5] and Sosnoff personally received $84 million"

https://en.wikipedia.org/wiki/Tom_Sosnoff

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Guest Guest

Posted

I'm a novice just starting out so TT was a good resource since it would dumb it down for me to understand.  If I remember correctly she mentions taking some courses that Tom & gang offered...I think that's the real money trail between Karen & Tom.  She is the "anyone can do it" example that can come from these courses.  I even remember looking into those courses for myself after watching her video and her talking about how much it helped.  If that is the case then I certainly don't think Tom is out of the woods.  He's leveraging a fraud, with potential prior knowledge of the fact, as a lead generator for his courses.  I forget what the courses were called, it's something he'll do on the weekends at hotel conference rooms or something and has nothing to do with the Dough courses.

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Tastytrade/dough/TD Ameritrade connection: 

http://johnsville.blogspot.ca/2014/11/tastytrade-shill-with-skills.html?m=0

 

"All of tastytrades promotions and shows are designed to sell investors on the idea that they can become elite traders. It is a powerful message, financial empowerment by building know-how, that has attracted a large and loyal audience. However, when you dig below the surface you will find tastytrade is really just about generating millions of dollars in commissions for TD Ameritrade. Rebranding options day trading as "investing" is grossly wrong. Day trading is not investing, it never was, and it never will be. Tastytrade is just a new age financial shill with some new skills."

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Guest Saltlick

Posted

Nobody ever mentions the negative accounts from his daughter(twice). Then they hit the reset botton and remember the muscle head guy from the inception of the show. Katie's account a loss from Bat and now his son is down 1k in over a year. Liz slipped on an episode and said that the account they trade is a TT account, not personally funded. Tom makes over 50 trades a day. Really. He said a few days ago that he always makes money on the S&P. He has been short since 1550. Short bonds for years but has no clue what bond convexity is. Studies are cherry picked for bias and agenda. Price extremes. His words. Value, not price boys. Karen is a fraud and got margin called to death. No attention to higher greeks. Vomma anyone. Selling prem is a very isolated way of trading. They preach it in ALL market conditions. P/L he says it is a compliance SEC issue. Can't seem to find that rule anywhere. Employees drop like flies and leave. People, he has had his hands in small businesses for years earning money in the trading space as a vendor for years. He was a MM on the floor. He said he managed a fund the other day. What happen? If it fails he blames everyone but himself. And last he worked for Drexel Burnham Lambert. If you don't know about them, do some research. Enough red flags.

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Very good observations. It is pretty amazing how he became so popular. But don't forget that he is the only financial network that has daily TV shows. We all know that charisma sells..

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Guest NotEvenWrong

Posted

I know I am late to the party here but I hope people googling will come to this article and really read what others have said.  Tastytrade is

designed solely to help Ameritrade churn commissions, plain and simple.  When you go to a casino, they buy you drinks, give you vouchers for dinners, etc.  You can even bring your handy dandy how to play blackjack sheet (which you buy in their gift shop) to the table.  Casinos do this because they know they have an edge plain and simple.  No matter what you do.  Same with Ameritrade/Tastytrade.  Tom doesn't care if his 50 trades a day win or lose, it's about activity.  His crack research team will comb the data to find trade results that match their hypothesis, not the other way around.  Ironically, I think the light is being shined on their poor trading results and what you will find is that they are gradually transitioning to different trades.  In and out and playing expiration is a tough game.  Unfortunately, trading the put skew in an index with 60+dte options and closing early doesn't generate enough commissions for their taste but that is the reality of one of the edges in this market.

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Guest Guest_D

Posted

I just started at Tasty trade 8 months ago and I am up 6% on my account this year. Tasty trade has countless of hours of free education. You guys use the fact that Katie and Case had drawdowns or blow ups, news flash all good traders start by blowing up small accounts. Also they just started Tastyworks and cut the commissions by a huge amount to help individual investors as many other firms have had to drop prices to compete. And let me guess, you charge for your services and education. I doubt my post will even make it to this page as this is just a witch hunt. Get a life guys. 

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1 minute ago, Guest Guest_D said:

I just started at Tasty trade 8 months ago and I am up 6% on my account this year. Tasty trade has countless of hours of free education. You guys use the fact that Katie and Case had drawdowns or blow ups, news flash all good traders start by blowing up small accounts. Also they just started Tastyworks and cut the commissions by a huge amount to help individual investors as many other firms have had to drop prices to compete. And let me guess, you charge for your services and education. I doubt my post will even make it to this page as this is just a witch hunt. Get a life guys. 

Yes, your post did make it. Unlike few dozens posts that I posted on tastytrade blog - all of them have been deleted. Unlike tastytrade, we don't sensor posts.

Good luck with tastytrade. You will need it.

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10 hours ago, Guest Guest_D said:

I just started at Tasty trade 8 months ago and I am up 6% on my account this year. Tasty trade has countless of hours of free education. You guys use the fact that Katie and Case had drawdowns or blow ups, news flash all good traders start by blowing up small accounts. Also they just started Tastyworks and cut the commissions by a huge amount to help individual investors as many other firms have had to drop prices to compete. And let me guess, you charge for your services and education. I doubt my post will even make it to this page as this is just a witch hunt. Get a life guys. 

I've been trading for 18 years now. My first year of trading monthly credit spreads on SPX, RUT, and NDX only (all 3 have beneficial tax treatment in the US), I made just over 95% returns on my whole account. The next year doing the same thing, I lost about 45%. I've known traders who primarily traded credit spreads and made a good income doing so; I hope you have good success trading, too. However, there is a lot more to it than "Credit spreads can't lose!". I'm exaggerating how Tasty Trade presents things, of course, but while they have some valuable education, they are clearly biased and the only way the average person knows this is to already have the knowledge base which generally makes Tasty Trade less valuable as a resource. All that said, the biggest issue I have with Tasty Trade is that they clean up everything to make it look like they're doing great and never made mistakes, which is obviously not true. If you were to follow Kim's (Steady Options owner) trades for any length of time, you'd see that he lays it all out and shows everything he does, even if it was a stupid decision. I prefer a straight shooter to a marketing machine any day, but if you can cut through all the BS, maybe Tasty Trade is a good resource for you. Good luck.

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On 6/3/2017 at 11:11 PM, Guest Guest_D said:

I just started at Tasty trade 8 months ago and I am up 6% on my account this year. Tasty trade has countless of hours of free education. You guys use the fact that Katie and Case had drawdowns or blow ups, news flash all good traders start by blowing up small accounts. Also they just started Tastyworks and cut the commissions by a huge amount to help individual investors as many other firms have had to drop prices to compete. And let me guess, you charge for your services and education. I doubt my post will even make it to this page as this is just a witch hunt. Get a life guys. 

Yes. 6% is a nice return. I'm wondering how much of it went to Tom Sosnoff pocket. There is just a small problem: S&P 500 was up more than double in the same period.

I have been SteadyOptions member almost since the beginning. I will take this paid site over "free" tastytrade every day. 

btw, Kim was among the few ones who called Karen Supertrader fraud when everyone else considered her a hero. Good call. Not the only one.

tastytrade has an army of marketers and "researchers". Ever wondered who is financing all those parasites? I can guarantee you it's not Tom Sosnoff. 

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