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Karen The Supertrader

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June 2016 UPDATE – Turns out Karen is under investigation by the SEC. Read the details here and here.

Original article below.

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 812,000 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.

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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 in to 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.

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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.

Is Karen A 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

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