Schadenfreude Warning: "Karen the Supertrader"

[ironchef]

I still don't understand why you're shorting options? Is it the "income", "premium selling", or something else that's attracted you to it?

How do you evaluate when an option is worth being sold versus being bought?

Asking when to go long and for how long is the equivalent of saying "I'm usually long equities but when I should short equities to improve my long equity strategy?"

I was implementing the usual scheme of mechanically selling options every month, like they all said, to generate monthly premium/income. And was told that was the correct first step for a new option trader: Low risk and lower volatility than holding the underlying.

I did try a different approach: sold only when the underlying was at a technical high (by technical indicators like RSI) but that didn't work too well either because when the underlying was at a local high, the IV was usually low and the premium was not too rich. Buying at a technical low had the opposite effect: high IV so premium was expensive, and local technical low often time get even lower and outcome wasn't good either. I came to the conclusion my counter parties were not stupid and handing me free money.

Still lots to learn.

 

[Niten Doraku]

I was implementing the usual scheme of mechanically selling options every month, like they all said, to generate monthly premium/income. And was told that was the correct first step for a new option trader: Low risk and lower volatility than holding the underlying.

I did try a different approach: sold only when the underlying was at a technical high (by technical indicators like RSI) but that didn't work too well either because when the underlying was at a local high, the IV was usually low and the premium was not too rich. Buying at a technical low had the opposite effect: high IV so premium was expensive, and local technical low often time get even lower and outcome wasn't good either. I came to the conclusion my counter parties were not stupid and handing me free money.

Still lots to learn.

I appreciate your candor. If you read works from Natenberg, MacMillan, and Taleb, you'll quickly appreciate option pricing methodologies. Shorting options isn't a bad thing, but the reason behind doing so needs to rely on a positive expectation for profit.

I would do you a disservice if I pretended that a brief post would start you on your way to profitability, but I believe the aforementioned authors will become invaluable sources for building a foundation towards that goal.

Don't forget that there isn't a holy grail or a secret indicator just like there isn't a magic pill at your doctor's office that will fix what ails you - everything is a remedy, some based on evidence and some not, but always with ample room for improvement.

 

[DTB2]

I suspect that most who apply the tasty way are drawn to the fact that options decay. So they think selling them and "waiting for the theta to come out" is the way to do things.

For those who seek to be in the "insurance business" of selling options; In early 2009, the State Farm Florida subsidiary, the state's largest insurer, threatened to withdraw from writing property insurance business in Florida after state regulators refused to approve a 47% property rate increase. State Farm said that, in Florida, it had paid out $1.21 in claims for every dollar in premiums since 2000. Several other home insurers have pulled out of Florida as well; many homeowners are now using the Citizens Property Insurance Corporation run by the state government.[17] State Farm has since decided to remain in Florida, although with a reduced amount of property policies.

(from wikipedia)

 

[DallasCowboysFan]

Don't bet on a criminal prosecution, however anything is possible. I'm not sure either regarding the clients going after her in a civil suit. According to the complaint, the SEC just wants money, and her investors will probably make claims from the restitution fund.
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I'd bet on it. The SEC didn't create 34 pages of legalese, document 94 Facts of wrongdoing, define 8 Felony Counts of criminal behavior and request a jury trial just to kill time.
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Ya, I see your point regarding how "she would think she would get away with it." Until she provides her defense, there's simply no way to know what went through her mind. It's quite possible she settles without admitting or denying the charges, and it's business as usual for
the SEC.

I'd bet on it. The SEC didn't create 34 pages of legalese, document 94 Facts of wrongdoing, define 8 Felony Counts of criminal behavior and request a jury trial just to kill time.

-----------

It doesn't matter what went through her mind, she is still guilty. She lost money, she took commissions she did not earn, she produced fraudulent statements and gave money to poor people that did not belong to her. While thumping her chest and saying....'look at me and how special I am'.

----
The SEC examination that uncovered the misconduct was conducted by Jamila Abston, Elaina Labossiere, and Ed McConnell under the supervision of Bill Royer and with assistance from Terry Moran in the Chicago office and Jim Richardson in the Miami office. The ensuing investigation was conducted by Peter Diskin, Graham Loomis, Joshua Mayes, Robert Gordon, and Grant Mogan in the Atlanta office with assistance from Mr. Moran and Mr. Richardson. The investigation was supervised by William P. Hicks, the Associate Regional Director of Enforcement in the Atlanta office.

^

That is a lot of people involved in an investigation if they don't expect a guilty verdict..

http://www.sec.gov/litigation/litreleases/2016/lr23551.htm

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

 

[Chubbly]

I'd bet on it. The SEC didn't create 34 pages of legalese, document 94 Facts of wrongdoing, define 8 Felony Counts of criminal behavior and request a jury trial just to kill time.

-----------

It doesn't matter what went through her mind, she is still guilty. She lost money, she took commissions she did not earn, she produced fraudulent statements and gave money to poor people that did not belong to her. While thumping her chest and saying....'look at me and how special I am'.

----
The SEC examination that uncovered the misconduct was conducted by Jamila Abston, Elaina Labossiere, and Ed McConnell under the supervision of Bill Royer and with assistance from Terry Moran in the Chicago office and Jim Richardson in the Miami office. The ensuing investigation was conducted by Peter Diskin, Graham Loomis, Joshua Mayes, Robert Gordon, and Grant Mogan in the Atlanta office with assistance from Mr. Moran and Mr. Richardson. The investigation was supervised by William P. Hicks, the Associate Regional Director of Enforcement in the Atlanta office.

^

That is a lot of people involved in an investigation if they don't expect a guilty verdict..

http://www.sec.gov/litigation/litreleases/2016/lr23551.htm

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

Also, the SEC knows about the monthly spreadsheet where Karen picked how much profit to show each month. My bet is they have an insider who they made squeal or made a bargain for immunity or a lesser sentence.

 

[Chubbly]

I was implementing the usual scheme of mechanically selling options every month, like they all said, to generate monthly premium/income. And was told that was the correct first step for a new option trader: Low risk and lower volatility than holding the underlying.

I did try a different approach: sold only when the underlying was at a technical high (by technical indicators like RSI) but that didn't work too well either because when the underlying was at a local high, the IV was usually low and the premium was not too rich. Buying at a technical low had the opposite effect: high IV so premium was expensive, and local technical low often time get even lower and outcome wasn't good either. I came to the conclusion my counter parties were not stupid and handing me free money.

Still lots to learn.

No offence but there are lots of threads on this forum about why you should or should not sell options (and lots of books as well) Please keep on the thread topic here of Karen.

If you want to learn about selling options please do so in another thread.

 

[ironchef]

No offence but there are lots of threads on this forum about why you should or should not sell options (and lots of books as well) Please keep on the thread topic here of Karen.

If you want to learn about selling options please do so in another thread.

Not a problem.

I was trying to ask some of the posters to clarify their statements about selling options and how she got in trouble, and their stated remedies on how she should have done.

I was hoping as a result we can understand exactly why her scheme failed and how to avoid it (perhaps as the others said, sometimes "go long"). Personally I do not believe her intend was to defraud investors right from the get go so somewhere along the line she got in trouble. If some of us can learn from you experts how she got in trouble and how she could have avoid it we all will benefit.

 

[ironchef]

I appreciate your candor. If you read works from Natenberg, MacMillan, and Taleb, you'll quickly appreciate option pricing methodologies. Shorting options isn't a bad thing, but the reason behind doing so needs to rely on a positive expectation for profit.

I would do you a disservice if I pretended that a brief post would start you on your way to profitability, but I believe the aforementioned authors will become invaluable sources for building a foundation towards that goal.

Don't forget that there isn't a holy grail or a secret indicator just like there isn't a magic pill at your doctor's office that will fix what ails you - everything is a remedy, some based on evidence and some not, but always with ample room for improvement.

Thank you for your reply.

I do understand and appreciate what you said.

 

[Chubbly]

Not a problem.

I was trying to ask some of the posters to clarify their statements about selling options and how she got in trouble, and their stated remedies on how she should have done.

I was hoping as a result we can understand exactly why her scheme failed and how to avoid it (perhaps as the others said, sometimes "go long"). Personally I do not believe her intend was to defraud investors right from the get go so somewhere along the line she got in trouble. If some of us can learn from you experts how she got in trouble and how she could have avoid it we all will benefit.

It has been stated numerous times why she failed. She sold way too many options on too high of leverage, hence losing 50% of her money on a very small 10% drop in the market.
Portfolio margin is like a nuclear weapon, you keep it in your arsenal but hope not to use it. She would have been fine if she was using RegT margin and suffered no loss in Oct 14 if she used a spread.
But guess what, spreads using RegT don't make much money compared to trading naked on Portfolio margin.

Funny when a 'hedge' fund doesn't hedge

She never backtested. A 10% in the market happens on average 1x/year. We just didn't have any 2011-2014 then in since Oct 2014 we have had 3 drops.

She overtraded because she was chasing returns because of greed, plain and simple.

Then she just had scheming trades since Oct 14 booking no real gains.

 

[ironchef]

It has been stated numerous times why she failed. She sold way too many options on too high of leverage, hence losing 50% of her money on a very small 10% drop in the market.
Portfolio margin is like a nuclear weapon, you keep it in your arsenal but hope not to use it. She would have been fine if she was using RegT margin and suffered no loss in Oct 14 if she used a spread.
But guess what, spreads using RegT don't make much money.

Funny when a 'hedge' fund doesn't hedge

She never backtested. A 10% in the market happens on average 1x/year. We just didn't have any 2011-2014 then in since Oct 2014 we have had 3 drops.

She overtraded because she was chasing returns because of greed, plain and simple.

Then she just had scheming trades since Oct 14 booking no real gains.

I understood all of that. What I was trying to understand was what some of you said she could avoid the big losses, or recovered the 50% losses by doing something to her trades/portfolio and I wanted to know what that something was, in general framework.

Anyway, thanks for taking the time to answer and I will leave this topic for now.

Regards,