Karen the Supertrader - Made $41 Million Profit in 3 Years Option Trading

  • JaeJunJaeJun
    Posts: 2,812
    wow this woman is amazing.
    She is a trader, but this video is watching.
    Strip out the trade talk and everything can be related to value investing.

  • 16 Comments sorted by
  • JaeJunJaeJun
    Posts: 2,812
    And then compare the above video to this one on Tim Sykes.
    Talks about how seekingalpha has so much manipulation and hype.

  • Good for her  =D> However, Investools is expensive. $22,000 for the tuition 
  • JaeJunJaeJun
    Posts: 2,812
    hopefully one day, OSV will be able to provide that type of education for a much more affordable price
  • I am wondering in order for her to make $44 million in trading option, how much brokerage fee she incurred
  • somrhsomrh
    Posts: 1,030

    In addition to that, she had to have been using a ton of leverage.

    From what I gathered she was doing short strangles at about 2 standard deviations out (assuming normal distribution, 2 standard deviations covers 95%). 

    If standard deviation for S&P is about 18% annualized, it'd be about 7.3% at 2 month intervals (she mentioned something about 60 day time spans). So the strike prices would have to be about +/- 15%.

    Now I haven't done anything with options on futures, but for comparison SPY is currently about $176. That would put the strike prices at about $150 for the put and $202 for the call.  So if you shorted those strike prices on SPY for the Dec 20 options (53 days), you'd earn $0.02 for the call and $0.18 for the put. Assuming no transaction fees, you could earn maybe $.20 on this. If you were completely covered (well, you can't be since it's a naked call but let's pretend) with $150 in cash you'd be earning 0.13%. Annualized that might be about 0.80% and you still have tail risk exposure on the call side.

    I'm guessing options on futures give a more leveraged dynamic, but you'd have to lever this trade up quite a bit to earn those kind of returns.

    Maybe her volatility figures were lower but that would just make you a little more exposed on the tail risk.

  • Doesn't it say she has over $80 M under management now.  That $41 M is the return she has made on all the capital she manages.  So that would imply that she was given $39 M to invest.  This is a double in 3 years which while impressive, isn't that far of an outlier.  The S&P doubled over the same time.  Now I'm assuming that she didn't get all $39M upfront so the returns may be a little higher that what I'm saying.  However, to imply she turned $22,000 into $41 M in 3 years is incorrect.

    I am a fan of her strategy.  She is selling options and appears to take a very conservative stance by selling way out of the money.  As @somrh said, she has to be using a lot of leverage to get this return, which is where she and I would part company.  It works until it doesn't.
  • somrhsomrh
    Posts: 1,030

    OK, so she doubled her money in 3 years which would require about 26% per year. I'll relax my standard deviation assumption a bit to 15% annual volatility. That puts 2 month volatility at about 6%. So a 12% move (2 standard deviations):

    Current Price $177.11
    -12%: $155.86
    +12%: $198.36

    So let's use $156 and $198 strike on the Dec 2013 options.

    That still puts the option prices at around $0.23 and $0.02 respectively. So you could earn about $0.25 on $156 (for a "covered" position) is 0.16%. Annualized that might be about 1%.

    So I'm wondering how much leverage she used. The follow-up question would be how much leverage can you get with options on futures?

    So for the above trade, with regular options if I'm doing the calculation correctly she needs a minimum

    20% x $177.11 - ($177.11-155.86) = $14.17.

    So that would raise the return to about 10%+ annually ($0.25 x 6 / $14.17 = 10.6%).

    One main difference here is that VIX was a lot higher during the period she was investing. Right now it's about 13%. Average VIX over the period she was investing was much higher (just eyeballing the chart) so that probably earned her significantly more returns.
  • JaeJunJaeJun
    Posts: 2,812
    I watched her whole video and while I don't have the exact details, from her persona and style, I don't think it was a whole lot of leverage. She is very conservative in her trades it seems.

    The futures market I'm sure offer a whole lot more opportunities to lever but as she moved to the indexes, I assume that would have gone down too.

    Here's a blog that someone wrote breaking down what he thinks she did.

  • somrhsomrh
    Posts: 1,030
    Regarding the minimum margin requirements, I overlooked something and then noticed CBOE has a margin calculator which put it at $15.83 instead of $14.17.

    As far as the blog we're describing it pretty similar.

    The main differences.
    • The blog author (Charles) suggests that the call options were 90% level instead of 95% level that I assumed. That would bring that in a bit and increase income but also increase the risk of the trade. 
    • Charles suggested that more puts were sold than calls. That makes the trade less risky but it would also lower returns. (Shoring both the puts and the calls doesn't really require additional margin so by employing the short strangle, you get more income for about the same amount of margin.)
    • Charles suggested she timed the trades selling the calls in a rising market and the puts in a falling market. I didn't factor that in as well.
    • Charles suggested that she didn't hold until maturity, exiting the position after one month. I'm not sure how to model that in but I'm guessing that would enhance returns.

    I'm not sure what the "suggested usage of 50% of capital" means. Does that mean she wasn't maxing out the leverage capacity?

    If I plug higher volatility in, I can get the option prices higher. Assuming average VIX of about 28%, I figure I can get the income up to around $3 (instead of the $0.25) . Multiply that by 6 (2 months x 6 = 1 year) and divide by 26% and that suggests a margin requirement of $69.23 which is not the minimum but still much lower than a covered position ($156). Maybe the "50% of capital" suggests she put up about $78.

    Some of the other aspects may have enhanced her returns so she may have been able to pull it off with less leverage but I'm still convinced leverage was required for this. 

    I'd wonder if she's doing the same thing now because this strategy probably doesn't work well now that VIX is much lower.

  • I have been trying the iron condors since 2010, finally this summer I gave up.  A few lessons learned:  (1)  The "95% safe" rule works most of the time, but when your strike price is under pressure you better be glued to your screen ready to roll out into the next month or close it out as a loss.  I tried using monthlycashthruoptions.com to manage these types of trades, as I have another job and cannot be dedicated to the trading screen during wall street hours.  (2)  High frequency trades = lots of commissions.  Even usings ThinkOrSwim or Tradeking, the commissions on these options trades will be $50+.  (3)  High taxes, all of your trades are short-term.  and (4)  One is completely at the whim of Mr. Market and the VIX.  I found this type of investing to be very stressful.  It is bullshit that this is easy money.  Yes, I suppose that 3 out of 4 options you trade that month might be.  But when you risk 100% to earn 5% might have seemed like easy money when one opens a bear call option three weeks ago.  Except now the SPY is rising and defying all analysts opinions of an impending crash.  Then on the day before expiration you are left wondering do you roll over into the next month and take a 10% loss + commissions (and risk playing the same game next month), or risk the call going in the money and being out 100%?   In sum, for 2013 CY, I am about 8% ahead with MTCO autotrading for me (and that doesn't include my commission costs+MTCO subscription+added stress) when the SPY is far higher.  If the VIX is consistently over 25, this strat works much better. 
  • Haha...I forgot some more lessons I learned...supposed you sell a bull put call for a expected 5% gain.  If your put expires in the money, you will be additionally liable for any dividends paid on the underlying equity/ETF.  So its actually possible to get over 100% loss trading options.  In summary, this type of option trading seems like easy money, but a single bad turn of the market can cost you several months worth of "5%" gains.
    Post edited by danno51 at 2013-11-01 22:21:42
  • JaeJunJaeJun
    Posts: 2,812
    that proves I'm not cut out for that type of stuff.
    still haven't dabbled with options or leverage. Will stick to the good old fashioned long only.
  • somrhsomrh
    Posts: 1,030

    I know I would never touch naked short calls. Having that long call on the other end there (as in the iron condor) would make me feel a lot better.

    But it is another one of those picking up pennies in front of a steamroller type strategies. The big question is when is the risk-reward appropriate and when is it overpriced.

    I did have one question on the dividends. Are you talking about being short the stock or simply short the puts? Because the latter shouldn't give you any dividend responsibility. Dividends should already be priced into option premiums.

    You only get dividends for owning the stock or owning stock that you lend to someone who is short. The latter you end up getting "paid in lieu" dividends which are taxed at normal income tax rates instead of the qualified dividend status.
  • somrhsomrh
    Posts: 1,030
    Oh and on the HFT, Interactive Brokers is probably the best option there. They require a minimum broker fees of $10/month but their prices are cheap enough that you can do a lot of trading and still keep that within $10/month.

    Personally I just focus on not trading too much; I don't think I could commit myself to $120 in fees (I try to go below that.) It would have been better for me in like 2010 and maybe 2011. But I've tried to be a little more disciplined in the number of trades I do (especially after seeing how much I was spending on broker fees.)
  • @ somrh:   No naked options involved.  Check out MTCO's website to see their spread strat and history.  I picked them as they were the most risk adverse of any of the option trading managers, and it was still too nerve racking for me.  If a person sells call spreads that are ITM when dividends are announced, the seller owes the buyer of the spread the dividends.  I found out via a Tradeking broker gave me a frantic call one day telling me that today was the ex-dividend date for my call spread I sold, and I had until the end of the trading day to buy back/roll out the spread or there would be the additional chance I would have to pay dividends on the SPY if it hit ITM at expiration.  As you said, that priced the option up even higher, making it even more expensive to close out the position. 

    The fees add up fast.  Ex.  Selling $4000 worth of a 180/182 SPY spread at Tradeking would cost $5 base + 13 for each leg (or  $36 total).    If it comes under pressure and you have to roll it out, then that is $36 x 2 to roll it out.   So by risking $4000, under the 5% rule, your expecting to get $200 in a short-term gain - $36 in commissions - your subscription cost (unless you are a day trader).  So even if it expires successful, I found the real ROI was more like 3% per month...which could get wiped out with a single 10% loss the next month.  
  • somrhsomrh
    Posts: 1,030

    OK, That makes sense with the dividends. Yeah, that's about the only time call options get exercised early is when there's a dividend near expiration. Whenever I write calls (covered mostly) I avoid expirations shorty after a dividend.

    Yeah, I don't know if I'd like to go for 3%/month. Even if you buy the idea that the returns are normally distributed, you'd still end up with, say, a 5% chance that you'll lose 100%. That means you'd have a 46% chance that it would occur during 1 year and a 70% chance of getting wiped in 2 years.