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  1. 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'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
  2. 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: 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: 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.
  3. 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 .Is she real? Does she really generate all those outstanding profits? Some people think Karen is a fraud. This article aims to clarify some facts about Karen SuperTrader and her trading results. Click here to view the article
  4. 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