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

[jamesbp]

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.

How do you know she is "Up" ... she won't discuss results for last "Down" market in 2008 ...

It's a bit like claiming to have won the match when you are "Up" at half time .... just ask the Kiwis who were 8-1 "Up" in the America's Cup .... only to end "Down" 8-9 ...

 

[newwurldmn]

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.

Selling naked options doesn't mean you don't have a proper risk management methodology. By your logic, buying stock means you don't have a proper risk management methodology.

Here's the question everyone should really be asking: how did she raise 100MM AUM? She's open about her strategy of selling tailis. She has no credentials. She doesn't have some huge marketing arm (meaning it's unlikely she convined 400 uninformed people to give her 250k). Odds are she's got 20 investors who put seveal million dollars each with her. People who are either savvy enough or have advisors savvy enough to understand the strategy risks that everyone here believes is some complex concept she doesn't understand.

I would wager that there is a lot more beneath her portfolio management than she is willing to mention publicly. If you are an accredited investor, you should call her and offer to give her money. See what she discloses then.

It's like Warren Buffet. He makes it sound simple: "I bought Goldman Sachs and then drank a cherry coke" but really there's hundreds of hours of analysis behind all his investments.

And if it happens that she's really good friends with the Frist family and they give her all 100MM as part of their charitable foundation, then who cares about her size as her returns haven't been vetted by the industry process.

 

[Pekelo]

Are you a police of this thread?

No, I am the common sense guy of this thread.

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

Where have you been in the last 5 years? We had high volatility and up and down market, and she is still around, so stop over generalizing and read the thread.... Bull market or not there were decent dips, check the charts....

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How do you know she is "Up" ... she won't discuss results for last "Down" market in 2008 ...

It is funny how everyone is harping on 2008. Not that it wouldn't be nice to know, but just use your brain:

1. Pretty much everyone lost money in 2008, so she losing wouldn't be anything special.

2. In 2009 she had 40 million AUM, so if she had blown up in 2008, she wouldn't have suddenly a huge influx of new money with only 2 years of data (and 1 year of losing heavily)

And as I quoted earlier, there were plenty of 8-10% drops in the last 5 years so it wasn't a cakewalk to heaven...

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Otherwise I agree with nwwurldmn, so whatever he said...

 

[jamesbp]

It is funny how everyone is harping on 2008.

Pretty much everyone lost money in 2008, so she losing wouldn't be anything special.

And as I quoted earlier, there were plenty of 8-10% drops in the last 5 years so it wasn't a cakewalk to heaven...

..

.... doesn't Karen harp on about every year except 2008
...... did everyone lose money in 2008? .... or just those Long Stocks / Short Tail risk
........ losing wouldn't be a big deal in 2008 ... so why so shy with disclosure
............. it's not the 10% drops you need to worry about

 

[Pekelo]

I guess it is repeat Sunday for me, so here we go:

.... doesn't Karen harp on about every year except 2008
...... did everyone lose money in 2008? .... or just those Long Stocks / Short Tail risk
........ losing wouldn't be a big deal in 2008 ... so why so shy with disclosure
............. it's not the 10% drops you need to worry about

1. No. There are 2 other years where we don't know her returns. She answered when she was asked, so blame the interviewer. Also, HF advertising is illegal, so she can't just blast out her results without being fined....

2. Yes, I would say 95% of HFs lost money, look it up.*

3. See point #1. Wasn't asked, can't advertise.

4. Good.

Any other questions?

* Since this is education Sunday:

"Nearly 700 funds - 7 percent of the industry - shut down in the first three quarters of 2008, up over 70 percent from the same period last year, according to Hedge Fund Research, a Chicago-based data firm. At that rate, roughly one in 10 hedge funds will have disappeared last year (2008) when final numbers are released in coming weeks.

Thousands more are expected to die in 2009 as investors who have been clobbered by losses yank out what's left of their money.

The average hedge fund lost 18 percent of its value in 2008, the industry's worst performance on record..."

http://www.cbsnews.com/news/hedge-funds-took-a-serious-hit-in-2008/


Bottom line is, if she had lost less than -18% in 2008, she had beaten the industry....Most likely she did, thus the huge jump in AUM...

 

[butterfacetrader]

Selling naked options doesn't mean you don't have a proper risk management methodology. By your logic, buying stock means you don't have a proper risk management methodology.

Here's the question everyone should really be asking: how did she raise 100MM AUM? She's open about her strategy of selling tailis. She has no credentials. She doesn't have some huge marketing arm (meaning it's unlikely she convined 400 uninformed people to give her 250k). Odds are she's got 20 investors who put seveal million dollars each with her. People who are either savvy enough or have advisors savvy enough to understand the strategy risks that everyone here believes is some complex concept she doesn't understand.

I would wager that there is a lot more beneath her portfolio management than she is willing to mention publicly. If you are an accredited investor, you should call her and offer to give her money. See what she discloses then.

It's like Warren Buffet. He makes it sound simple: "I bought Goldman Sachs and then drank a cherry coke" but really there's hundreds of hours of analysis behind all his investments.

And if it happens that she's really good friends with the Frist family and they give her all 100MM as part of their charitable foundation, then who cares about her size as her returns haven't been vetted by the industry process.

Im not the one who is talking her down here. But she has no real risk management that I can tell watching the interviews. The interviews are all I can go on buddy. I don't have any more insight than that. Neither do you for that matter.

As I mentioned in the other thread, her risk management as far as I can tell, involves not going all in, selling calls & puts to take home guaranteed premium on at least one end of the short leg, and possibly doing call spreads on the VIX (that she claims she hasn't considered doing for a long time). There isn't much hedging here. Having a fast trigger finger on the buy/sell and being a nimble trader is not called risk management. As far as I can tell this is how she gets out of trouble most of the time.

Hey, I'm all for people winging it and making a boat load of money. I have no problem with that. Props to all the TSLA longs that held on since 2013 pre-earnings gap. But its one thing to actually win, versus someone consciously taking care of a portfolio to make sure they are black-swan proof or is highly stress tested to survive 30% or more drawdowns in each position of their portfolio, and still walk out alive with still skin in the game. Most people are so levered, their portfolio cannot survive a 10% deviation of position value during stress testing.

As for her total AUM, who cares. Not sure why you bring AUM up at all and sidelining the argument. Could be rich friends and family giving her a bone. And it seems to have paid off for them. Nothing special here. I don't see the point in the rest of the talking points.

Anyway. All I'm saying is good for her. If shes up as much as she is, then thats great. I have no problem with people who just do everything right and win, but it has more to do with just great timing given the market conditions.

 

[butterfacetrader]

Where have you been in the last 5 years? We had high volatility and up and down market, and she is still around, so stop over generalizing and read the thread.... Bull market or not there were decent dips, check the charts....

My point is this is a defined bull market. Her strategy isn't even the best one.

In 2009, you could have tried to call bottoms and catch the falling knife on the SPX and easily average in a 750 on the S&P.

So, if she had gone straight up long positions in S&P futures from 2009, and kept on rolling over contracts. Today, she would have been worth many many times over. She would have been king trader.

Selling OTM option premium at 2SD points away, 60 days out, is less aggressive than straight up long futures and leveraged to the hilt all the time. But it actually underperforms an otherwise simpler strategy of BTFD that has worked for 5 years. Both BTFD and her selling tail risk premiums that is sometimes adjusted for directional moves by cover losing leg and selling heavy winning leg to offset, both involve a directional market with low volatility.

Volatility in the market has been compressing, not increasing in recent years. Finally, since the VIX is near all time lows, her strategy has obviously been less profitable these years. I'm sure she is aware, but just wait until the day she "does what she knows best! (folksy accent)" and sells a bunch of naked options in this low vol environment, and then a sell-off or fear is put back into the market and the vol starts picking up. The market doesn't even need to move and she will start getting closer and closer to the edge of getting a call from the margin clerk. And when the market sells off heavy or becomes extremely volatile and choppy along the way, lets see how well her trading skills are in trading around losing positions. THe frictional costs (commisions, spreads etc) will eat the account up.

 

[drownpruf]

There is no way to hedge naked risk into gaps. Ask Niederhoffer.

 

[butterfacetrader]

There is no way to hedge naked risk into gaps. Ask Niederhoffer.

Exactly. All those guys saying she must have this secret 'magic hedging sauce' when all we can tell from publicly available info is she is just doing naked options. There is no legit hedging going on.

(1) Sure the fact its a short strangle means there is some offsetting position to offset losses in one direction. (2) Sure, she did mention in one early interview of doing VIX bull call spreads as hedge of vega. Its a shame she claims she doesn't do it anymore but this would be considered a legit hedge to her style of portfolio.

And thats it. The rest is magic trigger finger and nimble ninja style trading skills of trading around positions. Leaving a bit of margin cushion, and consciously selling OTM options 2SD away as part of a portfolio strategy, is not considered risk management. I don't know if people realize that.

 

[ammo]

There is no way to hedge naked risk into gaps. Ask Niederhoffer.

strategy would be sound if she was long 2000 at .o1 for the 1000 total puts she is short above that strike, that' s2/1. she could be 3 or 4 to 1,cheap n maybe profitable insurance, at 2 or 3 bucks a contract, assuming she is short at 5 to 50 bucks