Karen the Super Trader

• Karen has an interview with Tom Sosnoff on Tasty

Trade
• To watch the interview, search google for: Karen
the super trader on tasty trade
• I will recap her exact strategy here.
• She started with $100,000 and ended up with
$41 million in profits through a combination of
her own money as well as additional money that
was given to her. Today she manages over $80
million.
 Her Strategy
• Karen got interested in options from a class,
then, while working full time as an
accountant, spent 5 years trading and learning
the business.
• After 5 years she was still break even.
• She started off doing directional trades:
buying calls and puts on stocks.
• Then she started selling spreads on stocks.
 Her Strategy
• And finally started selling spreads only on
indexes.
• Her switch from a breakeven trader to a
power trader was made once she started
implementing selling premium on the SPX,
NDX, and RUT.
• This happened at the end of 2007, with
$100,000 in her account.
• Let’s take a look:
 Her Strategy
• First, understand that with a larger account
(over 125K) you can apply for portfolio
margin, and you will have to put up much less
margin than you normally do.
• With Portfolio Margin, you need a minimum
of $1000 for every short index option, and
$200 for every short equity option. Larger
stocks like AAPL require more margin, but not
nearly as much as a “regular” account.
 Her Strategy
• Spreads of course will reduce the margin
requirements further.
• Shorting naked further out of the money is
less risk so it equals less margin.
• That is what Karen did – shorted naked further
out of the money index options.
• Whereas most people do this via “Iron
Condors” she just sold the calls and puts
naked.
 Her Strategy
• She only does SPX, NDX, RUT. She tried stocks but didn’t like the
random news announcements and earnings. Plus, once the
account started to really grow, only the SPX, NDX and RUT had
enough liquidity to handle her trading size.
• But doesn’t SPY, QQQ and IWM trade more volume?
• Yes, but they are also 10x smaller. 1 SPX contract = 10 SPY
contracts.
• So if you trade 100 SPY calls, you could just trade 10 SPX calls and
get the same price movement with much cheaper commissions.
• SPY options are based on the SPY ETF, while the SPX is based on the
actual 500 index stocks in real time.
• Because of this, SPX options are “cash settled.” Meaning if you end
up with SPX options that are in the money, you get cash. If you end
up with SPY options in the money, you get assigned the SPY ETF.
 A Few More Notes on SPX
• While NDX and RUT are traded electronically at multiple exchanges,
the SPX is a different story.
• Traded as SPX and SPXPM.
• They follow the 60/40 rule like futures (they are considered taxable
as section 1256 contracts).
• 60/40 = 60% of the profits are taxed as long term gains while only
40% is taxed as short term, even on day trades.
• Cash settled, so there is no reason to close out a trade just to
eliminate the risk of being assigned (i.e., don’t have to worry about
pin risk).
• They are European style, so they can ONLY BE EXERCISED at
expiration. Thus you don’t have to worry about being assigned
early if they go in the money and you don’t have to worry about ex-
dividend dates.
 A Few More Notes on SPX
• They are four types of SPX options.
• The standard AM settled options that expire
the morning of the third Friday of the month
(SPX). These are floor traded and have wide
bid/ask spreads.
• Three PM settled options: SPXW (weeklies),
SPXQ (quarterlies) and SPXPM (monthlies).
• These all settle Friday afternoon.
A Few More Notes on SPX
A Few More Notes on SPX
 Her Strategy
• She shorts puts and shorts calls
• These have better profits than iron condors
but they do have “unlimited risk” because
they are naked.
• Calls are sold at delta 10 (90% probability of
success).
• Puts are sold at delta 5 (95% probability of
success). This would equal about a 12% drop
in the SPX for her to get in trouble.
 Her Strategy
• Typically sells twice as many put contracts as
call contracts (this is known as a “combination
strangle” since there aren’t an equal number
of puts and calls being sold.
• In addition to the deltas, she will use 2.0
standard deviation bollinger bands to make
sure she is selling at or just outside of those
levels.
 Her Strategy
• She sells them 8 weeks before expiration (56
days)
• She starts out with just half the position
• Then she will add calls when the market rallies
• And add puts when the market falls
• Usually exits the trade a month later
• If at 1 month any of the options are delta 1,
she will let those expire worthless.
 Her Strategy
• She will make adjustments when ITM (in the
money) probability reaches 30%
• Adjustments are based on selling new Delta 5
puts and new Delta 10 calls from current price
levels.
• Normally keeps identical profits by rolling
up/down/out and selling new contracts.
 Her Strategy
• With extreme selling in the markets, she will
give up profits for a few months to roll out a
couple of months and wait for the markets to
settle down.
• No stops.
• No delta neutralization
• Uses 50% of her capital to set up positions.
• With adjustments, she will go up to using 80%
of her capital.
 Her Strategy
• In other words, a lot of her account is in these
positions.
• Her large use of capital is justified by the
probability of success (90% on calls, 95% on
puts) and her ability to make adjustments
when she gets in trouble.
• She keeps an eye on her Net Liquidating Value
(account balance if she dumped everything)
 Her Strategy
• To her mind set is key.
• It’s all a numbers game.
• Focus on probability, not P&L.
• Losses are acceptable – NO FEAR.
• Manage the trading process.
• Lower returns caused by lower market volatility is
fine. Don‘t push it.
• Keep the rules simple – anything else is just
noise.
 Her Strategy
• Today she trades and manages over $100
million doing this strategy.
• It’s her, 4 other traders, and an accountant.
• Her goal is 30% per year, which equals $82 per
day of theta decay per $100,000.
• Tried this strategy with equity stocks but
didn’t like it due to random news
announcements and earnings.
 Her Strategy
• Karen’s quote on selling premium: “When you
give me your money, you don’t get it back.”
• Adjustments are the most important thing she
does.
• She knows exactly what to do when the trade
goes against her as far as adjusting and taking
advantage of other credits (i.e., selling other
options) to make up for the initial loss.
 Her Strategy
• She makes sure the market does not get back
any credit once she receives it.
• That is, once she receives the credit (typically
8 weeks/56 days out) her plan is to KEEP IT.
• As the value of the option decreases to
generate a profit of around 15%, the position
may be closed.
• For ones that don’t face danger, they will be
allowed to expire worthless.
• Due to the large accounts she is trading, she only looks
at NDX, RUT, SPX these days. These contracts can
handle a ton of volume.
• In the indexes, there is a lot of volatility premium built
in, because pension and mutual funds HAVE to stay
fully invested.
• One of their main ways to hedge is to buy index
options, which creates permanent high volatility in the
SPX, NDX and RUT.
• BUT – since the indexes move less than 1% most days,
as a seller you soak up all of that volatility premium
decay.