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

[butterfacetrader]

I believe her story is legit.

If she is not a supertrader she is a better trader than 95% of people who are trading.

A lot of comments talk about Karen blowing up in 2008. I don't think it would be the case at all. She might have had some losing months, but once the trend is identified (down) she might simply reverse her strategy and sell calls instead.

She said she goes along with the trend, not against it and that's what the vast majority of traders does.

Yeah. I think there are a few people here who seem more on the sour-grapes side.

Assuming we believe the going story and facts about her returns. Frankly anyone who has not seen her account statements (and I believe that will be all of us here I presume?) wouldn't know either way whether she is speaking facts, so there is no point in arguing about her returns.

Her returns are great and she is better than most traders. But one of the truly best traders of all time is probably John Arnold who turned millions into billions trading nat gas futures and posting triple digit returns for years. Thats someone who is more in the hall of fame category. Hes smart too. He is out of the game now. Quit while you are ahead. Frankly if I made a billion I'm out too. No point risking anything anymore.

 

[Pekelo]

I think we can all agree selling directional betting premium in a defined trended market will make you money. Selling puts in a bull market. Selling calls in a bear market..

Dude, first read the freaking thread. She sells both sides. (She actually said last year was difficult when the market went straight up almost all year) Then second, read about the last 5 years of market conditions, (or again, you could just read this thread) and you will see that there were plenty of downsides in the last 5 years. The point here is that her strategy has been pretty well tested under all conditions...

Then you can go back to your over generalizations...

 

[butterfacetrader]

Dude, first read the freaking thread. She sells both sides. (She actually said last year was difficult when the market went straight up almost all year) Then second, read about the last 5 years of market conditions, (or again, you could just read this thread) and you will see that there were plenty of downsides in the last 5 years. The point here is that her strategy has been pretty well tested under all conditions...

Then you can go back to your over generalizations...

Are you a police of this thread? Seems you are out to enforce what everyone else gets to say here.

So what if options strangles are used. I'm actually watching the interview right now and at the point where she is explaining how she will readjust a position after a big move in one direction causing one short leg to be losing, where they will sell just enough in the offsetting leg to recoup the loss of premium from having to cover the losing options.

Thats actually quite risky. It means, if say she is short 10 put and 10 call with 5% chance of being ITM, and SPX gaps up and calls losing money and sitting at 40% chance ITM. She will close out some of the calls at a loss and sell puts in the same month to collect premium that offset losses just to break even. Which means she is now net heavy on short puts.

So if the market gaps higher, and she adjusts this position, but the next day gaps back down and lower, and then following that the market gets sold into, then she will be caught holding the bag if it moves fast towards the direction she is net heavy short options. Maybe she will then readjust once again. But then there is huge frictional cost with execution costs, spreads and price moves. Also, the market might swing back up later, to again a situation where you might have to readjust back the other direction. So on and so fourth.

Clearly she requires a flat to definitive market direction. High volatility and uncertainty with market direction and it wouldn't work.

With all the fancy pantsy trading around of options strangle positions, the last 5 years was a bull market. If you spent all that same margin allocation being long futures, and maybe selling a far dating covered call, over the last 5 years, you would probably have made more money than selling strangles when the market was not flat but definitively up.

 

[1245]

Are you a police of this thread? Seems you are out to enforce what everyone else gets to say here.

So what if options strangles are used. I'm actually watching the interview right now and at the point where she is explaining how she will readjust a position after a big move in one direction causing one short leg to be losing, where they will sell just enough in the offsetting leg to recoup the loss of premium from having to cover the losing options.

Thats actually quite risky. It means, if say she is short 10 put and 10 call with 5% chance of being ITM, and SPX gaps up and calls losing money and sitting at 40% chance ITM. She will close out some of the calls at a loss and sell puts in the same month to collect premium that offset losses just to break even. Which means she is now net heavy on short puts.

So if the market gaps higher, and she adjusts this position, but the next day gaps back down and lower, and then following that the market gets sold into, then she will be caught holding the bag if it moves fast towards the direction she is net heavy short options.

Like I said, with all the fancy pantsy, the last 5 years was a bull market. If you spent all that same margin allocation being long futures, and maybe selling a far dating covered call, over the last 5 years, you would probably have made more money than selling strangles when the market was not flat but definitively up.

in reference to your comment"5% chance of being ITM," that would not be typical of her or the majority of naked option sellers. The puts she sells (and other) tend to be 20 %to 25% OTM the money for 10 days or less and more OTM going out 30 to 60 days. These options normally have close to a zero delta and have close to a zero chance of going in the money. The main risk is liquidity. During times of stress (down markets) these options that trade $0.05 to $0.10 wide can go $1.00 wide. This increases the implied vol and can cause margin calls at a time when you can't cover at "fair" prices.

Calls tend to be much closer to being ITM so have higher margin requirements and hence are not sold in the same volume. They are also easier to cover since they rarely go as wide as the puts.

1245

 

[butterfacetrader]

in reference to your comment"5% chance of being ITM," that would not be typical of her or the majority of naked option sellers. The puts she sells (and other) tend to be 20 %to 25% OTM the money for 10 days or less and more OTM going out 30 to 60 days. These options normally have close to a zero delta and have close to a zero chance of going in the money. The main risk is liquidity. During times of stress (down markets) these options that trade $0.05 to $0.10 wide can go $1.00 wide. This increases the implied vol and can cause margin calls at a time when you can't cover at "fair" prices.

Calls tend to be much closer to being ITM so have higher margin requirements and hence are not sold in the same volume. They are also easier to cover since they rarely go as wide as the puts.

1245

I think they were explaining in the video where she trades options with 5% chance of being ITM. I don't know. I don't care to rewind the video but it seems she is selling tail risk premium, or what Nassim Taleb would call picking up pennies in front of a freight train.

But suppose so. Sure there is liquidity risks. But being a strangle, one leg will definitely be a profit. So it means adjusting only the other leg closer to ITM. If there is really a very close call at expiration and liquidity dries up at expiration, you can probably just go long/short futures to hedge it out.

 

[butterfacetrader]

Just done watching one interview. I don't get the haters. I personally don't think her strategy works in all terrain and she will be tested sooner than later like everyone else has been tested. But if she is making money she is making money.

Its like how people complain about TSLA. Meanwhile the college students and other retail investors who don't know a thing about stocks bought in on the name last year before the major short squeeze, because of no more than hopes and dreams and that they like the name, while it still had no P/E, made out like a bandit with 300% gains. Meanwhile all the 'pros' are lined up on the short side of the name, and then TSLA goes up 300% over time. Guess whos laughing? Thats right, the 'stupid' longs while the pros continue to blast away at it.

I see tremendous risk in her strategy of selling tail risk premium and then her strategy of readjusting positions. I think big ups and down moves but otherwise flat in a longer run picture might make her put on bad trades that might have lots of frictional losses. But if its been working, then why not. I think if she is smart she will know when to leave while you're still up. If you strike it on the roulette table, you don't sit there and continue betting because the odds are against you and you will eventually give back everything. Make money, and then walk away.

 

[newwurldmn]

I think they were explaining in the video where she trades options with 5% chance of being ITM. I don't know. I don't care to rewind the video but it seems she is selling tail risk premium, or what Nassim Taleb would call picking up pennies in front of a freight train.

But suppose so. Sure there is liquidity risks. But being a strangle, one leg will definitely be a profit. So it means adjusting only the other leg closer to ITM. If there is really a very close call at expiration and liquidity dries up at expiration, you can probably just go long/short futures to hedge it out.

A futures hedge won't be effective. She's trading extremely convex stuff and so her deltas will be changing too much. On top of that she won't be compensated for this chop because the initial premiums are so low.

I think she's been successful because she's probably actually very prudent. She's an old lady who was an accountant - she's probably actually very good at risk management. she's not your typical elitetrader cowboy who thinks he's smarter than everyone else.

 

[butterfacetrader]

A futures hedge won't be effective. She's trading extremely convex stuff and so her deltas will be changing too much. On top of that she won't be compensated for this chop because the initial premiums are so low.

I think she's been successful because she's probably actually very prudent. She's an old lady who was an accountant - she's probably actually very good at risk management. she's not your typical elitetrader cowboy who thinks he's smarter than everyone else.

I was responding to the guy who was discussing about options liquidity drying up up at expiration date and that might cause run in SPX moves to cross the strike of the short options hence loss of profit. So you can hedge that out with an algo with futures.

Actually if you watch some of her interviews, she explains she is an accountant and very quantitative and technical in nature when she started. But over time became more a go on gut instincts and strategy kind of trader.

As for risk management, anyone selling naked options in the form of strangles, and not even iron condors with defined limited risk, has no risk management here. You can argue she is a superior trader. And clearly if she can pull it off she is a good trader (i.e. buying and selling of securities to time markets). But there is no risk management being that leveraged and taking on naked short options positions like that. Her other risk management technique as far as I can tell is not going 100% all in. I think she mentions being 70%(?) max at any given time. So she can take the odd blow.

Her risk management seems to be as follows:
-Selling both calls & puts to create short strangles. So at least she is not betting directionally, which means premium from one end will at least soften blow to the other if there is a run on her in one direction.
-Not fully maxing out margin room
-Talked about VIX bull call spreads as a potential hedge trade but mentioned she has not been doing that recently in one interview.

None of that stuff is really a very legit hedge, except maybe the call spread on the VIX to hedge out some of the vega risk.

But clearly this strategy of selling tail risk premium is losing effectiveness. The VIX is at all time lows. And while she continues to be in the business of selling premiums, the profits must be dwindling compared to years with higher volatility. And if volatility picks up again, she is at real risk of vega really picking up with her short options too (on both sides of puts/calls no less). Of course she is probably not a one trick pony. Maybe she will flip sides to be long options. Like how Paulson bet against real estate before and now bet on it. Play both sides.

 

[jamesbp]

Its like how people complain about TSLA.

Guess whos laughing?.

... Tulips, Tesla, Tail Risk ...
........it's he who laughs last that laughs loudest

 

[butterfacetrader]

... Tulips, Tesla, Tail Risk ...
........it's he who laughs last that laughs loudest

I'm just saying people who are talking down karen is more of a sour grapes.

Its like people talking about TSLA.

Maybe in conventional establishment circles karen's risky positions are not their style, and they express this opinion. Perhaps they are even correct in an academic sense. But she is making money from it. Even if she doesn't know what she is doing, as the pros may argue, she is making money.

Again, its like who cares that TSLA has no P/E when your stock is up 300%. You sell it now and you get to laugh. Most of the mom&pop who purchased TSLA before the earnings gap up in 2013 didn't do anything. They just sat there and watched it go up 300% over time and didn't/still don't know what was going on. They just enjoyed the ride and it worked for them. Call it luck, but thats what it is.

So while selling premium is risky, karen has made money up till now and is up. Will she stand the test of time? Who knows. But she is up.