What does Karen the Supertrader and her results say about volatility? Oversold?

sonoma · Mar 29, 2014

sle said:
...I am pretty sure Karen is legit, but the story feels incomplete.... and [it feels like she] reports performance selectively.

I think the above is the essential element missing for half the comments in this thread. At the end of the day, we simply don't have enough information to verify her returns.

jamesbp · Mar 30, 2014

Squilly_D said:
20% is a considerable move in something like an index (SPX in this case). If this event was to occur in such short notice to where people didnât have time to respond, I would personally speculate that there would be some type of mean revision in that same time period - similar to the flash crash.

Were you trading in 2002 and 2008?

TskTsk · Mar 30, 2014

sle said:
The real question is "is it profitable to underwrite tail risk?" and the empirical evidence is that it is. E.g. selling 1 month var from 1990 to today is perfectly profitable, with worst DD whiping out 3 years of your returns. There are good reasons why risk premium is overpriced and it has to to with the micro-structure of the financial industry. As an outside player, retail investor has a little bit of a loophole - though I would not be surprised if that closes soon.

Here's someone claiming selling ATM straddles outperform VAR. The VAR got killed in 2008 (as you said wiped out 3 years of gains) whilst ATM was barely touched and recovered remarkably quick: http://www.surlytrader.com/volatility-selling-strategies/

I e-mailed the guy trying to get a hold of the Barclays study he used but did not get a response.

However I can say I've been selling ATM vol for some time now as one of my strategies, I diversify as much as possible, and it seems to outperform selling puts in terms of severerity of drawdowns and seems to outperform pretty much everything I've tried so far. One of my fav strategies for sure. Manage risk, diversify and dont be an idiot, take stops, and you can make a nice living doing this. At least that's my experience.

Squilly_D · Mar 30, 2014

jamesbp said:
Were you trading in 2002 and 2008?

No, I didn't even know what trading was prior to 2006. I started "trading" in 2008, that's when I opened my first brokerage account. My first trade was in SRS and made a small amount...then proceeded to suck @ss wile learning how to truly trade. I started option trading late 2012.

Below are my personal results so far...I still have a long way to go...in trading knowledge and experience. /NG was my own personal whipsaw that I managed to survive - 39.54% (calculated from 1.23.14 low to 2.24.14 high in /NG) in 22 trading days followed by a -30.96% (calculated from 2.24.14 high to 2.26.14 low in /NG) in 2 trading days. I can't compare it to 2002 - 08 but it definitely was a great learning experience for me when it comes to selling premium! I got greedy too and left a majority of it on the table...

Instead of being up ~13.5% YTD it would have been ~34%. Lesson learned. By the way, this was my first rodeo with a future options product so the initial shock of the fact that P/L was still changing after market close had me on edge for a couple of days.

Martinghoul · Mar 30, 2014

NG has lost people a LOT of money this year...

Squilly_D · Mar 30, 2014

Martinghoul said:
NG has lost people a LOT of money this year...

I walked away being up overall on the trade(s) but it sucked to do all that work and finish close to where you started.

newwurldmn · Mar 30, 2014

sle said:
There where plenty of ways to sell vol in a limited downside way at the time - I bought ITM up and out calls, for example.

PS. Buffer exploited a number of edges over the years, main one being AAA counterparty (sell long-dated puts, don't post, sit tight - that one worked out for him).

You think they could have done 30bn notional in knockout calls?

I think the reason they sold puts vs pure vol was because they had simple to understand bounded risk which is why they didn't have to put up collateral.

General RE sold the puts (not buffet directly) and they are in the business of taking in premiums and hopefully not them back out (vs laying out cash now and hoping to get more back later)

Pekelo · Mar 30, 2014

jamesbp said:
Usually better to base assumptions on some sort of facts ....

That's what I said to Colin Powell about the Iraqi WMDs.

I really don't want to listen to 3 hours of interview again, but didn't they say something like she hasn't had a losing year since she went pro? That would indicate that she did at least 0.1% in 2008. (what again, would have been excellent in that year).
But again, HF performance is measured against the general market, so most investors would have been very happy losing only 5-10% in 2008.

Also, what is more likely, knowing that people were throwing money at her in 2009?:

1. She had a spectacular 2007 (50%) and a very bad 2008. Or

2. She had 2 very good, consecutive years outperforming the market.

sle · Mar 30, 2014

newwurldmn said:
You think they could have done 30bn notional in knockout calls?

I think the reason they sold puts vs pure vol was because they had simple to understand bounded risk which is why they didn't have to put up collateral.

General RE sold the puts (not buffet directly) and they are in the business of taking in premiums and hopefully not them back out (vs laying out cash now and hoping to get more back later)

They did 3 yards of Nikkei/Stoxx/Spooz worst-of puts in 2007, I was there and got a T-shirt. Petty sure they could have lifted the street on 10bn of barriers if they wanted to. But I agree that selling puts was a pure insurance trade.

Martinghoul · Mar 30, 2014

As far as I can tell, a trade like this is equivalent to BRK borrowing $5bn unsecured at 20y OIS rate (actually, this isn't entirely clear; could be they discounted the premia at the BRK's risky rate, although this isn't what the Lehman doc that people in FT talked about suggests). I don't see how this is a poor trade...