* Faith * Preparation * 知行合一 * 活在當下: Karen the “Super Trader”

Karen the “Super Trader” has gained some recent fame in the options world, as she generated outsized returns using a simple trading strategy. She has been featured on Tasty Trade twice and quite a few people have asked me about her recently. Her two interviews on Tasty Trade have had a combined 350,000 views on You Tube. The two videos are embedded at the bottom of this post.

Karen initially started with a relatively small investment pool and turned that capital into hundreds of millions of dollars. Her strategy entails collecting income from the options market but the risks she takes are substantial.

She started with 100,000 dollars which is still a sizeable amount of capital to start with. She doubled that money relatively quickly and was able to attract capital as she continued to double her returns. She professes to currently manage 190 million dollars, after making nearly 105 million in profits.

Karen only trades options and started focusing on more than 30 underlying assets, which generally included stock indices. She currently only trades three indexes which include the S&P 500 index (SPX), the Nasdaq 100 (NDX) and the Russell 2000 (RUS).

Karen currently has two funds. The second fund was created for clients as all of the profits of the first fund go directly into her charity.

Strategy

Karen the “Super Trader” earns her income from selling options. She would still be regarded as a “retail” trader even though her capital is substantial. She uses the Think or Swim platform and looks for 12% out of the money puts and 10% out of the money calls that are rich in implied volatility to earn time decay which is also known as theta. Time decay is calculated by dividing the premium by the number of days left before the expiration of the option.

The main premise of her strategy is to sell into strength (sell naked calls on up moves) and buy into weakness (sell naked puts on down moves). It strikes me that if the position continues to move against her, she continues to add to the position, taking on more and more risk. This is a tough strategy and losses pile up at an exponential rate. She has a large amount of capital behind her and can theoretically continue to double down as the market moves against her. While it is a valid (albeit risky) strategy, she must had some pretty giant sized cojones to be risking $190 million.

Naked calls and puts can have their place in your portfolio but for the average retail trader with $100K or less in their account, it would be very difficult to replicate Karen. The risk of blowing out your account is pretty high. Remember “the market can stay irrational longer than you can stay solvent”.

Karen uses Bollinger bands which is a technical tool to find specific strike prices that are unlikely to be reached based on the current market environment. Bollinger bands are an indicator that shows 2-standard deviations around a 20-day moving average. By using this tool, Karen can find strike prices that are unlikely to be reached, to place trades that are approximately 56 days to expiration.

Another tool Karen uses is charting implied volatility. She uses charts to measure the VXX and OTM volatility charts to find levels when implied volatility is rich or cheap. The technique Karen uses to mitigate risk is avoiding her Lick (Net Liquidating Value). The lick is applied to premium-paid upfront options cleared by an exchange.

Karen strategy is very risky as implied volatility can rise and markets can accelerate wiping out huge amounts of capital generating significant margin calls. A margin call is an amount of capital that will be required by the exchange to hold onto current positions. If the margin call is not made by an investor the position will be liquidated by the exchange involuntarily.

Karen’s strategy is also short gamma which means as the market moves against her, the positions become worse at a greater rate. Karen also experiences large swings in returns, with losses of more than 4% within a month, but the upside returns have been much greater than the adverse returns.

Karen is very matter of fact about her business. She sees the returns as numbers but does not take trading personally. She has a strong trader mindset and seems confident in her style.

Fraud?

There have been some people who think Karen is a fraud. Her results are amazing. The skeptic in me wonders how genuine they are. The romantic in me wants to believe. It’s every traders dream to turn a small account into a multi-million dollar account.

Watch Karen the Supertrader on Tasty Trade

The Lazy Trader
1 year ago

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. How can she obtain those returns is beyond my understanding. Unless she has some special deal with TOS and is required less margin than usual. For example selling the October SPX 1485 Put right now (10.20% probability to be in the money by expiration) yields 470 dollars but the reduction ins your buying power is almost 21 thousand dollars. So yes about 2% return. And that return is only in that one position! Not the overall portfolio. In order to achieve that return over the whole portfolio she would need to put that trade using all the capital, or several trades like that one, but in the end the idea is the same, marginalizing all your capital in order to obtain a 2% equity growth. The math never worked for me. Like you, the romantic in me also wants to believe the story.

Good article.
LT
- TraderX
  1 year ago
  
  Simple. She has customer portfolio margin and sells short strangles. The margin required is much less than for Reg T accounts. Her magic is in how she manages the positions and her position sizing. That’s every trader’s edge…if you can exploit it. This is the part she holds close to the vest but most can guess at least some of her tactics.
  - Options Trading IQ
    1 year ago
    
    Very true. Good comment TraderX.
- Options Trading IQ
  1 year ago
  
  Great comment LT. I’ve had a few emails about this article, it’s certainly peaked a lot of people’s interest.
  
  Apparently the Tasty Trade guys asked for proof before interviewing her, which would make sense, they wouldn’t want to ruin their reputation by having a fraud on their show.
  
  I think the story is true.
  
  In terms of margin, I would think she uses deep OTM options to control margin.
  - Txsckb
    10 months ago
    
    Yes, she stated that she “tricks” herself into thinking the market is already 100 points down and then takes her strike price down an additional 10-12%
- Erik Trofatter
  10 months ago
  
  Karen is on Portfolio Margin so her reduction in BPR is much much less, almost a third of that amount. My fund trades this strategy as well, however, I only risk 10% of my account on this strategy because as the positions move on you, the margin requirement expands, sometimes 2 or 3 times. Karen will be back on Tasty Trade February 11th for a live show at night. Should be a really interesting show being that Tom will finally be breaking into the “how she does it”
  - Options Trading IQ
    10 months ago
    
    Hi Erik,
    
    Thanks for letting us know about her return appearance on Tasty Trade.
  - Jonny Phun
    8 months ago
    
    Can you please explain what Portfolio Margin? Thanks.
    - Erik Trofatter
      8 months ago
      
      Portfolio margin is a reduced margin allowance set federally as a minimum of 100,000 account balance. However Brokers can have more stringent requirements. For instance, TD Ameritrade’s PM requirements start at 125,000, where Interactive brokers start at the FINRA minimum of 100,00. Portfolio Margin is a more leveraged margin calculation that looks at the overall potential risk of an entire portfolio and assigns margin per position accordingly. Portfolio Margin can allow a trader to have up to 6/1 leverage over a trader only using reg-t Margin. The more money you have, the better your margin.
      - Options Trading IQ
        8 months ago
        
        Thanks Erik, great explanation!
- matt
  6 months ago
  
  She doesnt use TOS anymore is my guess….might have a personal account or something or started with them and investools…but not now
- Actuary
  5 months ago
  
  I wish I were the romantic that Lazy Trader referenced but unfortunately he is right on the money with his example. It seems the comments to his posting are quick to brush it aside but there is no escaping his logic. I am an Actuary and have been using a strategy almost identical to what is described in this article used by Karen for 12 years. While biased to the methodology, I found that the math just doesn’t seem to add up.
  
  To determine an optimal portfolio return, one needs to focus on maximizing capital or in this case margin which represents the minimal capital required. According to the CBOE website regarding margin, a one-sided trade may cost 3.5%-5.5% of an underlying S&P contract, initially. This assumes Reg-T margin. There are many factors impacting the margin %, but the most significant are the inherent probability of success, the type of margin account and how well-balanced your portfolio is. Volatility and Days to Expiration and other factors are assumed to be incorporated into the % chance of success, so they are out of the equation for now.
  
  Switching to Portfolio Margin may significantly improve your results as well as writing on both sides. Only the $ of premium is added to margin for the second side. Assuming a 95% chance of success, premium equal to 10% of margin is not unrealistic. If you have such an account you can see for yourself. A new wrinkle is the portfolio stress test imposed on accounts by trading firms which serves to only increase margins.
  
  The amount of margin could be slightly lower but easily higher especially if the market moves on you. Since you are carrying risk for 2 months out implies a tie down of capital for that period and if replicated continually, i.e., 10% per 2 months, could possibly result in a return of 60% money over a year’s time. Over 3 year’s time, that would be a 4 fold increase in your money. Again, this calculation assumes margin is 100% utilized, no stress hurdles to overcome and every trade unfolds perfectly.
  
  A more reasonable return would be in the neighborhood of 40% as extra cushion is generally needed above the required margin and not every trade goes as planned. More importantly there is a predictability to this return over playing it out long which is what makes short option trading so much more desirable. Consistency trumps alpha.
  
  The Supertrader’s methodology makes perfect sense but unfortunately the dollars don’t. One poster suggests he “thinks” the story is true and another credits the “magic..” to exploitive position management. While there doesn’t appear nor do I believe there is any intent to deceive, the numbers just simply don’t add up. Seller BEWARE that if you are short on both sides of the market, selling strangles as it is, it is a mathematical certainty that you will be limited in your returns unlike going long. Albeit, while the returns over the long haul will be better by being short, the only way you will get $41 million in profits starting from $700k is if someone hands it to you. Tread carefully…the market doesn’t pay us hopeless romantics in kind.
- E. Cunningham
  5 months ago
  
  If you don’t understand how she did it you should really get out of this game!
dniel
1 year ago

“sell naked calls on up moves” and “sell naked puts on down moves” I don’t get this.. aren’t you supposed to “buy calls on up moves” or “buy puts on down moves” to make money??? even theta decay would not catch up on a moving market in either direction in typical 30 – 50 days??
- Options Trading IQ
  1 year ago
  
  Hi Dniel,
  
  Thanks for your comment.
  
  Karen trades what is sometimes referred to as a “mean reversion” strategy. After a sustained up move, the likely future direction is down and vice versa. She probably doesn’t sell calls on every up day or puts on every down down. Rather, she probably waits for an extended move in one direction before placing her trades.
  
  If a stock or index moves too far away from it’s moving average (50 day, 200 day etc.), chance are that it will eventually revert to the mean, or long-term average.
  
  Buying calls on up moves and buying puts on down moves as you mentioned would be a trend following strategy.
  
  Both are valid ways to trade and each has it’s own advantages and disadvantages.
Richard
1 year ago

link me to her website, i wish to visit it
bfis108137
6 months ago

For those that can’t get portfolio margin which is most traders then you can do what she does with es futures. Futures will give you a similar underlying but with margin similar to portfolio margin. Also since 1 es future is 50 instead of 100 contracts you will have more flexibility than spx. As an example one atm option in es will cost ~8400 to open and only 6700 to hold. spx in reg-t margin will cost about 27,000 and portfolio margin will cost about 10,000 to open. Portfolio margin is still better as you would have to trade 2 es contracts to equal 1 spx but futures margin is still only 30% more than portfolio margin and half that of reg-t.
- Jermelle Mitchell
  6 months ago
  
  I thought of this but wouldn’t the commissions be very high with all those contracts?
jeff
6 months ago

How about just sell call spread or put spread instead of naked call and put? Less capitals and less profit, but safer.
- Options Trading IQ
  6 months ago
  
  It certainly is Jeff, I think like to have the higher Theta associated with the naked options but they of course carry much more risk.
Chris
6 months ago

One important point to keep in mind is that the growth of her assets under management of $100,000 to around $190 million is not purely from trading gains… the majority is from new investment from clients. She has stated her annual returns from trading are in the 25-35% range. In 2013 she returned around 28%. She has returned more in years with higher volatility.
Matt
5 months ago

Of course she’s not a fraud, what a stupid suggestion.
Lez Trade
5 months ago

I don’t think she’s able right now to deliver those great return. Don’t forget that she was trading over 30 stock at the start, and it’s easier to deliver big return trading stock like aapl, nflx etc whit a small account… Don’t forget that selling option while volatility was surging in 2008-2012 should have been really profitable. I think in 2013-2014, she must have some trouble to deliver 2 digits returns. But her strategy his great for a big account, i’m trying to achieve the same kind of thing. 3 digit return so far this year
tony
4 months ago

karen’s strategy works
Scott Swallows
4 months ago

Is there a way to have your company manage my money. I have 100,000 dollars.

Thx

Scott Swallows
Andy
3 months ago

Karen the super trader is no fraud. I googled her, found her name and name of the two funds. Her funds file every year with the SEC, all public records. You can view her 2013 filings.
stuart sugden
3 months ago

This story certainly comes over as genuine. One issue is surprising to me. That is much of 2008 was a time when the market made major crashes. And yet she claims she started this strategy in 2007. There is no way she could have made money selling naked or even covered puts in such a major down market. Had she reserved her trades to only selling calls maybe. Buying put options would have been a way to make a huge fortune in 2008 but this is not what she is claiming. Puzzling. 2008 was a tremendous year for trend following systems. Her system is the opposite of that to a significant degree.

Since she claims her approach is conservative presumably the selling of options was hedged. If not both margins are higher and there is a huge risk with limited reward.

And why can I not find her on searches that give more complete information? What is her last name? Did I miss something?
Gavin
3 months ago

Hi Stuart, I think she is reasonably private. I’m not aware of what her last name is.
strategy works
3 months ago

This strategy works. Generated 64K in 6 months. Very volatile. And you can see +/- 20% or more swings in one day…