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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.

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. 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." 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: Karen SuperTrader: Myth Or Reality? Karen The Supertrader by Optionstradingiq A Glimpse of option strategies of Karen Karen The Supertrader Interviewed by tastytrade Karen the Supertrader's Winning Strategy Relied on Fraud, SEC Alleges Karen The Supertrader - SJ Options Tastytrade: A Shill with Skills The Spectacular Fall Of LJM Preservation And Growth

In one of my previous articles, I described a hedge fund manager called Karen the "SuperTrader". She was featured few times by tastytrade as "one of the most successful and fascinating traders". Tom Sosnoff admitted that he "admires" her. What Sosnoff fails to mention time after time is the amount of risk Karen is taking, compared to her returns. 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. Click here to view the article