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This is a critical issue that many traders don't fully understand. To understand the real risk this lady is taking, I would like you to take a look at Victor Niederhoffer. This guy had one of the best track records in the hedge fund industry, compounding 30% gains for 20 years. Yet, he blew up spectacularly in 1997 and 2007. Not once but twice. Are you Aware of Black Swan Risk? This is how Malcolm Gladwell describes what happened in 1997: "A year after Nassim Taleb came to visit him, Victor Niederhoffer blew up. He sold a very large number of options on the S. & P. index, taking millions of dollars from other traders in exchange for promising to buy a basket of stocks from them at current prices, if the market ever fell. It was an unhedged bet, or what was called on Wall Street a “naked put,” meaning that he bet everyone on one outcome: he bet in favor of the large probability of making a small amount of money, and against the small probability of losing a large amount of money-and he lost. On October 27, 1997, the market plummeted eight per cent, and all of the many, many people who had bought those options from Niederhoffer came calling all at once, demanding that he buy back their stocks at pre-crash prices. He ran through a hundred and thirty million dollars — his cash reserves, his savings, his other stocks — and when his broker came and asked for still more he didn’t have it. In a day, one of the most successful hedge funds in America was wiped out. Niederhoffer had to shut down his firm. He had to mortgage his house. He had to borrow money from his children. He had to call Sotheby’s and sell his prized silver collection. A month or so before he blew up, Taleb had dinner with Niederhoffer at a restaurant in Westport, and Niederhoffer told him that he had been selling naked puts. You can imagine the two of them across the table from each other, Niederhoffer explaining that his bet was an acceptable risk, that the odds of the market going down so heavily that he would be wiped out were minuscule, and Taleb listening and shaking his head, and thinking about black swans. “I was depressed when I left him,” Taleb said. “Here is a guy who, whatever he wants to do when he wakes up in the morning, he ends up better than anyone else. Whatever he wakes up in the morning and decides to do, he did better than anyone else. I was talking to my hero . . .” This was the reason Taleb didn’t want to be Niederhoffer when Niederhoffer was at his height — the reason he didn’t want the silver and the house and the tennis matches with George Soros. He could see all too clearly where it all might end up. In his mind’s eye, he could envision Niederhoffer borrowing money from his children, and selling off his silver, and talking in a hollow voice about letting down his friends, and Taleb did not know if he had the strength to live with that possibility. Unlike Niederhoffer, Taleb never thought he was invincible. You couldn’t if you had watched your homeland blow up, and had been the one person in a hundred thousand who gets throat cancer, and so for Taleb there was never any alternative to the painful process of insuring himself against catastrophe. Last fall, Niederhoffer sold a large number of options, betting that the markets would be quiet, and they were, until out of nowhere two planes crashed into the World Trade Center. “I was exposed. It was nip and tuck.” Niederhoffer shook his head, because there was no way to have anticipated September 11th. “That was a totally unexpected event.” Well, guess what - unexpected events happen. More often than you can imagine. The market bottomed right after Niederhoffer was margin called. By November, the market was back near highs. His 830 puts went on to expire worthless - meaning his trade, had he been able to hold on, turned out to be profitable. But his leverage forced his liquidation. He was oversized and couldn't ride the trade out. Niederhoffer had shorted so many puts that a run-of-the-mill two-day market selloff sent him out on a stretcher. If he had sized the trade correctly, he would have survived the ride and took home a small profit. But the guy was playing on tilt, got greedy, maybe a bit arrogant, and lost all of his client's money. Karen is managing over 300 million dollars now. Her annual returns are in a 25-30% range. Are those good returns, based on the risk she takes? Not in my opinion. I believe that betting 300 million dollars on naked options is a disaster waiting to happen. I'm sure that most of her investors are not aware of the huge risks she is taking. Niederhoffer's story should be a good lesson, but for most people, it isn't. Unfortunately, people desperately want to believe there is a way to make money with no or little risk. Personally, I have hard time to understand why Sosnoff is promoting those strategies. But this is a different story. As a side note, this article is not an attempt to bash tastytrade. It is an attempt to show a different side of the coin and point out some historical cases. If we don't learn from history, we are doomed to repeat it. tastytrade advocates selling premium based on "high IV percentile". They ignore the fact that IV is usually high for a reason. Personally, I consider selling naked options before earnings on a high flying stocks like NFLX, AMZN, ULTA, TSLA etc. as a very high risk trading. tastytrade followers consider those trades safe and conservative. Matter of point of view I guess. Some tastytrade followers argued that PUT Write index performed better than SPX. And it is true. But those are completely different strategies. The original purpose of PUT Write index (or any naked put strategy) is to buy stock at a discount and reduce risk. As long as you sell the same number of contracts as the number of shares you are willing to own, you should be fine, and in many cases to outperform the underlying stock or index. The problem with Karen Supertrader and Niederhoffer was that they used too much leverage. They sold those naked options just to collect premium. Same is true when you sell strangles before earnings. Related articles: Karen SuperTrader: Myth Or Reality? Karen Supertrader: Too Good To Be True? Do You Still Believe in Fairy Tales? Selling Naked Put Options The Spectacular Fall Of LJM Preservation And Growth James Cordier: Another Options Selling Firm Goes Bust June 2016 update: Turns out Karen is under investigation by the SEC. Read the details here and here.

Who Was Karen the Supertrader? Karen Bruton, known better as Karen the Supertrader, is a former hedge fund manager who became famous after multiple appearances on the Tastytrade live show. Bruton started as a novice retail trader who knew virtually nothing about trading and became a multimillionaire in a handful of years. Specifically, she turned $110,000 into $41 million between 2008 and 2011 using basic option selling strategies. Following her massive personal trading success, Karen started a hedge fund called Hope Advisors. Nowadays, Karen the Supertrader is infamous because she was barred from managing outside money by the SEC. According to the SEC’s complaint, Bruton was continually rolling losing positions forward to avoid realizing a loss and thus, in the eyes of the SEC, misleading investors. Because selling options results in immediate income, it’s been the weapon of choice for traders who are hiding large losses. Nick Leeson, a rogue trader who famously brought down Barings Bank, also hid his losses by selling naked options. What Was Karen the Supertrader’s Strategy? Karen the Supertrader’s trading strategy, sometimes referred to as the “KST method,” was based on the concept of theta decay. Her approach involved short selling options with the expectations that they would become worthless upon expiration. By focusing on options that were highly likely to expire out-of-the-money, Karen leveraged the gradual erosion of their time value to her advantage. Karen focused primarily on equity index options on the S&P 500, Nasdaq 100, and Russell 2000. Focusing on a small number of highly liquid symbols allowed her to form a consistent strategy. Her strategy involved selling options that were two standard deviations out-of-the-money with expiration dates ranging between 30 and 56 days to expiration. In other words, these options were roughly 95% likely to expire worthless. As far as systematically selling options goes, Karen’s strategy is par for the course. Most traders who use a similar strategy tend to sell deep out-of-the-money (OTM) options, as they will expire worthless most of the time. The strategy tends to rack up several consecutive winning trades that are relatively small in size with a rare losing trade that will be significantly larger. Karen the Supertrader Trading Rules Let’s take a more granular look at the specific trading rules that Karen the Supertrader has publicly reported using. Firstly, she preferred a short strangle trade structure. This gave her a market neutral market outlook, taking no position on which direction the market will move next. Her only goal with the trade was for the market to remain inside her chosen strikes until expiration or until she closed the trade. Here’s an example of what a short strangle looks like: When it comes to short strangle strike selection, Karen the Supertrader used Bollinger Bands to select her strikes. Bollinger Bands are a technical indicator that plots trading bands two standard deviations away from a moving average. See the chart below for an example: She primarily traded in expiration dates ranging from 25 days to 56 days at the latest. To round up all of these rules, let’s create a rough example of an SPX short strangle trade that Karen the Supertrader might take, based on the rules she’s reported publicly in her Tastytrade interviews: ● Trade type: short strangle ● Put strike: 3875 ● Call strike: 4230 ● Expiration date: June 23 (39 days to expiration) Karen would typically take profits on winning trades, and roll out losing trades to a later expiration. 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: 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: 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. - 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. 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. 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. This strategy will only work for a period of time. When it stops, the results will be catastrophic. 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. 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? Here are the links to the SEC claim and the verdict: https://www.sec.gov/news/pressrelease/2016-98.html https://www.sec.gov/alj/aljdec/2019/id1386cff.pdf 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. Karen the Supertrader: Where Is She In 2023? The SEC sued Karen the Supertrader’s hedge fund, Hope Advisors, leading to the hedge fund paying a hefty fine, disgorging of profits, and Karen Bruton’s ban from managing outside money. However, Karen still appears in interviews, like she did with Michael Sartain in 2022. She maintains that the SEC unfairly targeted her firm seeking an easy prosecution. Both Karen and Michael Sartain, the host of the podcast, claim that the SEC’s complaint took issue with the fact that Karen’s hedge fund rolled losing positions forward, a common practice among systematic premium sellers. Her point of view is that the SEC interpreted the fund rolling its losing positions forward as the act of a rogue trader, rather than the routine actions of an options trader who sells premium.

There is some pretty decent open interest on that strike for both expirations (~10k contracts), but you probably couldn't get that much done (I did a 20 lot). I find it odd I even got filled on this spread and who would want to take the other side of it. Maybe Karen the Supertrader read your blog and thought it wise to add some long gamma to her portfolio as a hedge.